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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 20, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ISS GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7372 58-2362189
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
41 PERIMETER CENTER EAST, SUITE 660
ATLANTA, GEORGIA 30346
(770) 395-0150
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
---------------------
THOMAS E. NOONAN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ISS GROUP, INC.
41 PERIMETER CENTER EAST, SUITE 660
ATLANTA, GEORGIA 30346
(770) 395-0150
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
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<C> <C>
CARMELO M. GORDIAN, P.C. KEITH F. HIGGINS, ESQ.
S. MICHAEL DUNN, P.C. CHRISTOPHER J. AUSTIN, ESQ.
BROBECK, PHLEGER & HARRISON LLP ROPES & GRAY
301 CONGRESS AVENUE, SUITE 1200 ONE INTERNATIONAL PLACE
AUSTIN, TEXAS 78701 BOSTON, MASSACHUSETTS 02110
(512) 477-5495 (617) 951-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed solely to add exhibits to a
registration statement, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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===================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value... 2,875,000 shares $11.00 $31,625,000 $9,330
===================================================================================================================
</TABLE>
(1) Includes 375,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 20, 1998
2,500,000 SHARES
[INTERNET SECURITY SYSTEMS LOGO]
ISS GROUP, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,200,000 shares
are being sold by the Company and 300,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price per share will be between $9.00 and $11.00. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "ISSX".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
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INITIAL PUBLIC UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total(3)............................. $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $700,000 payable by the Company.
(3) The Company and the Selling Stockholders have granted the Underwriters an
option for 30 days to purchase up to an additional 375,000 shares at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments, if any, of which an option to purchase
310,000 shares has been granted by the Company and an option to purchase
65,000 shares has been granted by the Selling Stockholders. The Company will
not receive any proceeds from the sale of shares by the Selling
Stockholders. If such option is exercised in full, the total initial public
offering price, underwriting discount, proceeds to Company and proceeds to
Selling Stockholders will be $ , $ , $ , and
$ ,respectively. See "Principal and Selling Stockholders" and
"Underwriting".
---------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1998, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
UBS SECURITIES
WESSELS, ARNOLD & HENDERSON
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The date of this Prospectus is , 1998.
<PAGE> 3
[PHOTOS TO COME]
Firecell, Fireblanket, Firewall Scanner, Internet Scanner, Internet
Security Systems, Intranet Scanner, ISS, SAFEsuite, System Security Scanner, S3,
Web Security Scanner and the ISS logo are trademarks of the Company. All other
trademarks or trade names referred to in this Prospectus are the property of
their respective owners.
The Company intends to furnish to its stockholders annual reports
containing audited financial statements examined by its independent auditors.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
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PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. Except as
otherwise noted, all information in this Prospectus, including share and per
share information, assumes (i) the mandatory conversion into Common Stock of all
outstanding shares of Series A and Series B Redeemable, Convertible Preferred
Stock (the "Convertible Preferred Stock") upon the consummation of the Offering,
(ii) no exercise of stock options after December 31, 1997 and (iii) no exercise
of the Underwriters' over-allotment option. Unless the context otherwise
requires, the terms "Internet Security Systems", "ISS" and the "Company" refer
to ISS Group, Inc. and its consolidated subsidiaries. See "Description of
Capital Stock" and "Underwriting".
THE COMPANY
Internet Security Systems is the leading provider of network security
monitoring, detection and response software that protects the security and
integrity of enterprise information systems. The Company's SAFEsuite family of
products enforces "best practice" information protection automatically across
distributed computing environments by monitoring and responding to continuously
changing network security risks. By dynamically detecting and responding to the
security vulnerabilities and real-time threats inherent in open systems,
SAFEsuite products protect distributed computing environments, including
internal corporate networks, extranets and the Internet, from attacks, misuse
and security policy violations. The Company's products rely on an innovative
Adaptive Security Management ("ASM") approach to network security, which entails
continuous security risk monitoring and response to develop and enforce an
active network security policy. ISS pioneered the technology for vulnerability
and threat detection through a dedicated security research and development team
and believes that it has the most comprehensive vulnerability and threat
database in existence. The Company has delivered its network security
monitoring, detection and response solutions to over 1,500 organizations
worldwide, including firms in the Global 2000, U.S. and international government
agencies and major universities. Nine of the ten largest commercial banks in the
United States have licensed the Company's products.
The proliferation of client/server architectures, the growth of the
Internet as a business tool and the emergence of intranets have dramatically
increased the openness of distributed computing environments. Although open
computing environments have many business advantages, their accessibility and
the relative anonymity of users makes these systems, and the integrity of the
information that is stored on them, vulnerable to security threats. According to
the 1997 Annual Information Week/Ernst & Young LLP Information Security Survey
of information technology ("IT") managers and professionals, 42% of all United
States respondents reported malicious acts from external sources, up from 16% in
the previous year, and 43% reported malicious acts by employees, compared with
29% in the previous year. The conflict between the benefits of open systems that
provide easy access to corporate information and the need to protect
mission-critical information and applications from unauthorized use and
disruption requires solutions that allow organizations to implement, enforce and
evaluate an informed security policy.
ISS has developed ASM, a dynamic, process-driven approach to
enterprise-wide network protection. The ASM process relies on the principles of
monitoring, detection and response to the ever-changing vulnerabilities in and
threats to the network protocols, operating systems and applications that
comprise every network system. The Company's monitoring, detection and response
products provide easy-to-use software solutions designed to enable network
managers to centrally define and manage an enterprise-wide security policy for
their existing network system infrastructure, including all Internet protocol-
enabled devices. The Company's SAFEsuite family of products provides the ability
to visualize, measure and analyze real-time security vulnerabilities and control
threats across the entire enterprise network infrastructure, keeping the
organization's IT personnel informed of changing network conditions and
automatically making adjustments as necessary. Through custom policies or by
using the Company's "best-practice" templates, network managers can minimize
security risks without closing off the
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organization's network to the benefits of open computing environments and the
Internet. The Company's products extend across a broad range of platforms and
work with the products of leading security and network management vendors to
provide a single point of management and control for an enterprise-wide security
policy across multiple hosts, operating systems and applications. Through the
Company's senior research and development team of security experts known as the
"X-Force", ISS maintains a proprietary and comprehensive knowledge base of
computer exploits and attack methods, including what the Company believes is the
most extensive collection of Windows NT vulnerabilities and threats.
The Company's objective is to be the leading provider of ASM systems that
proactively protect the integrity and security of enterprise-wide information
systems from vulnerabilities, misuse, attacks and other policy violations. ISS
focuses on developing innovative and automated software solutions to provide
customers with a comprehensive framework for protecting their networks by
monitoring for vulnerabilities and real-time threats in order to enforce "best
practice" network and system security policies. The Company is seeking to meet
its objective by continuing its leadership position in security technology,
expanding its domestic sales channels, promoting its professional services
capabilities, expanding its international operations and creating ASM category
awareness.
The Company was incorporated under the laws of Delaware on December 8, 1997
as a holding company for Internet Security Systems, Inc., a Georgia corporation
incorporated on April 19, 1994. Prior to incorporation in Georgia, the Company
operated as an unincorporated association and distributed its first product as
shareware in 1992. The Company's principal executive offices are located at 41
Perimeter Center East, Suite 660, Atlanta, Georgia 30346. Its telephone number
at that location is (770) 395-0150.
THE OFFERING
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<S> <C>
Common Stock offered by the Company..................... 2,200,000 shares
Common Stock offered by the Selling Stockholders........ 300,000 shares
Common Stock to be outstanding after the Offering....... 15,878,428 shares(1)
Proposed Nasdaq National Market symbol.................. ISSX
Use of proceeds......................................... For general corporate purposes,
including working capital and
possible acquisitions. See "Use of
Proceeds".
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(1) Excludes 1,883,850 shares of Common Stock issuable upon exercise of options
outstanding at December 31, 1997 at a weighted average price of $2.71 per
share. See "Management -- Board of Directors" and "-- Restated 1995 Stock
Incentive Plan", "Certain Transactions" and Note 6 of Notes to Consolidated
Financial Statements.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
Company. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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<CAPTION>
APRIL 19, 1994
(INCEPTION) YEAR ENDED DECEMBER 31,
THROUGH --------------------------
DECEMBER 31, 1994 1995 1996 1997
----------------- ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 38 $ 257 $ 4,462 $13,467
Operating income (loss).......................... 20 (140) (1,205) (4,147)
Net income (loss)................................ 20 (140) (1,131) (3,919)
Unaudited pro forma net loss per share(1)........ $ (0.28)
Unaudited weighted average shares used in per
share calculation(1)........................... 14,181
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<CAPTION>
DECEMBER 31, 1997
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PRO FORMA AS
HISTORICAL PRO FORMA(2) ADJUSTED(3)
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 3,929 $ 3,929 $23,689
Working capital....................................... 2,272 2,272 22,032
Total assets.......................................... 9,866 9,866 29,626
Long-term debt, net of current portion................ 70 70 70
Convertible Preferred Stock........................... 8,878 -- --
Stockholders' equity (deficit)........................ (5,058) 3,820 23,580
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing unaudited pro forma net loss per
share. Pro forma net loss per share is not included for periods prior to
1997 because such comparisons are not meaningful due to the conversion of
all outstanding shares of Convertible Preferred Stock into Common Stock upon
consummation of the Offering.
(2) Reflects the conversion of all Convertible Preferred Stock into an aggregate
of 5,736,957 shares of Common Stock upon consummation of the Offering. See
Note 4 of Notes to Consolidated Financial Statements.
(3) Pro forma as adjusted gives effect to the sale by the Company of 2,200,000
shares of Common Stock offered hereby after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. See "Use of Proceeds".
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should carefully consider the
following factors in evaluating the Company and its business.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company was incorporated in April 1994 and has never achieved
profitability, nor does the Company expect to achieve profitability in the
foreseeable future. Accordingly, the Company has only a limited operating
history upon which an evaluation of the Company and its prospects can be based
and is subject to all of the risks inherent in the establishment of a new
business enterprise. The Company's prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early state of development, particularly companies in new and rapidly evolving
markets. To address these risks, the Company must, among other things, respond
to competitive developments, continue to upgrade and expand its product
offerings and continue to attract, retain and motivate qualified personnel.
There can be no assurance that the Company will be successful in addressing such
risks, that the Company's revenue growth will continue in the future or that the
Company will achieve profitability in the future or, if achieved, that the
Company could maintain such profitability on a quarterly or annual basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
SIGNIFICANT POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future revenues and operating results are uncertain and are
expected to fluctuate from quarter to quarter and from year to year due to a
combination of factors, including the demand for the Company's products, the
volume and timing of orders, the level of product and price competition, the
expansion of the Company's domestic and international sales and marketing
organizations, the Company's ability to develop new and enhanced products and
control costs, the Company's ability to attract and retain key technical, sales
and managerial personnel, the mix of distribution channels through which the
Company's products are sold, the growth in the acceptance of, and activity on,
the Internet and World Wide Web ("Web"), particularly by corporate,
institutional and government users, the growth of private Internet protocol
("IP") networks (or "intranets"), the extent to which unauthorized access and
use of online information is perceived as a threat to network security, customer
budgets, seasonal trends in customer purchasing, foreign currency exchange rates
and general economic factors. As the Company increasingly focuses on sales of
the Company's product suite rather than individual products, the Company expects
that the sales cycle associated with the purchase of the Company's products will
lengthen. In addition, the amount of revenues associated with particular
licenses can vary significantly based upon the number of products that are
licensed and the number of devices involved in the installation. The Company has
experienced and may continue to experience from time to time very large,
individual license sales which can cause significant variations in quarterly
license revenues. Moreover, small delays in customer orders can cause
significant variability in the Company's license revenues and results of
operations for any particular period. As a result, the timing of significant
orders is unpredictable and, like many software companies, the Company typically
realizes a significant portion of its software license revenues in the last
month of a quarter. The Company establishes its expenditure levels for product
development, sales and marketing and other operating expenses based, in large
part, on its expected future revenues. As a result, if revenues fall below
expectations, operating results and net income are likely to be adversely and
disproportionately affected because only a small portion of the Company's
expenses vary with its revenues.
Based upon all of the foregoing, the Company believes that the Company's
quarterly and annual revenues, expenses and operating results are likely to vary
significantly in the future and that period-to-period comparisons of its results
of operations are not necessarily meaningful and, in any event, such comparisons
should not be relied upon as indications of future performance. Moreover,
although the Company's revenues have increased in recent periods, there can be
no assurance that the Company's
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revenues will grow in future periods, that they will grow at past rates or that
the Company will achieve profitability on a quarterly or annual basis. Due to
the foregoing or other factors, it is likely that the Company's operating
results may be below market analysts' expectations in some future quarters,
which could materially adversely affect the market price of the Common Stock.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Selected Quarterly
Financial Results".
COMPETITION
The market for security monitoring, detection and response products and
services is intensely competitive and the Company expects competition to
increase further in the future. There can be no assurance that the Company can
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other competitive resources.
The Company's principal competitors generally fall within one of three
categories: internal IT departments or consulting firms that assist such
departments, relatively smaller software companies that offer applications with
limited scope and larger software companies that are either in the process of
entering the Company's market or have the potential to develop products to
compete with the Company's products. Due to a lack of awareness of the Company's
products and services or a lack of appreciation of the complexity involved in
the development of automated systems to establish and, more importantly,
maintain comprehensive and effective levels of security within a distributed
computing environment, potential customers often rely on their IT departments to
internally formulate security systems or to retain consultants to undertake such
a project. Second, there are a number of companies that currently market or have
under development software applications to provide network and Internet
security. The Company expects additional competition from these established
competitors and from other emerging companies. Any future mergers or
consolidations among these competitors would make them more formidable
competitors to the Company. There can be no assurance that the Company's current
and potential competitors will not develop security monitoring, detection and
response products that may be more effective than the Company's current or
future products or that the Company's technologies and products will not be
rendered obsolete by such developments. Finally, there are a number of companies
that currently market and sell various software products, such as encryption,
firewalls, operating system security and virus detection software, that have
been broadly adopted by the Company's customers and potential customers to
provide various levels of security within their computing environments. Some of
these companies have released products which provide similar functionality as
certain of the Company's products. In addition, vendors of operating system
software or networking hardware may in the future enhance their products to
include functionality that is currently provided by the Company's products. The
widespread inclusion of the functionality of the Company's software as standard
features of operating system software or networking hardware could render the
Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable to that of the Company's products. Even if
the security auditing and monitoring functionality provided as standard features
by operating system software or networking hardware is more limited than that of
the Company's software, there can be no assurance that a significant number of
customers would not elect to accept more limited functionality in lieu of
purchasing additional software. Many of these larger companies have longer
operating histories, greater name recognition, access to larger customer bases
and significantly greater financial, technical and marketing resources than the
Company. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the promotion and sale of their products than the Company. If these companies
were to introduce products that effectively competed with the Company's
products, they could be in a position to substantially lower the price of their
security auditing and monitoring products or to bundle such products with their
other products, which would make it more difficult for the Company to compete
with them.
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For the foregoing reasons, there can be no assurance that the Company will
be able to compete successfully against its current and future competitors.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would materially and adversely affect the
Company's business, operating results and financial condition. See "Business --
Competition".
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapid
technological advances, including by those seeking to establish more secure
systems and those seeking to compromise such systems, evolving industry
standards in computer hardware and software technology, changes in customer
requirements and frequent new product introductions and enhancements. As a
result, the Company must continually change and improve its products in response
to changes in operating systems, application and networking software, computer
and communications hardware, programming tools and computer language technology.
In particular, the market for Internet and intranet software applications has
only recently begun to develop and is rapidly evolving. Therefore, the Company's
future success will depend upon its ability to continue to enhance its current
product line and to develop and introduce new products that adequately address
and respond to innovations in computer hacking methodologies, keep pace with
technological developments, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. There can be no assurance that the
Company will be successful in developing and marketing, on a timely and
cost-effective basis, fully functional product enhancements or new products that
respond to technological advances by computer hackers and other unauthorized
users of online information, or that its new products will achieve market
acceptance. If the Company does not respond adequately to the need to develop
and introduce new products or enhancements of existing products in a timely
manner, the Company's business, operating results and financial condition would
be materially and adversely affected. See "Business -- Product Development".
As a result of the complexities inherent in the security of distributed
computing environments and the broad functionality and performance demanded by
customers for such products, major new product enhancements and new products can
require long development and testing periods to achieve market acceptance. The
Company has on occasion experienced delays in the scheduled introduction of new
and enhanced products. In addition, software programs as complex as those
offered by the Company may contain undetected errors or "bugs" when first
introduced or as new versions are released that, despite testing by the Company,
are discovered only after a product has been installed and used by customers.
The deployment and use of the Company's products by one or more customers, if
not properly completed, has resulted in the past and may result in the future in
temporary disruptions to the operation of the customer's networking system,
which may adversely affect the Company's relationship with such customers. There
can be no assurance that errors will not be found in future releases of the
Company's software, or that any such errors will not impair the market
acceptance of these products and materially adversely affect the Company's
business, operating results and financial condition.
The processes and methodologies used by computer hackers to access or
sabotage networks and intranets are ever changing and generally not recognized
until launched against one or more targets. Therefore, the Company, in most
cases, is unable to anticipate these processes and methodologies. To the extent
that customers' computing environments are compromised, such customers may
perceive the Company's products as ineffective in protecting their systems,
which may result in a reduction in orders from such customers and the loss of
customer goodwill, which could adversely affect the Company's business,
operating results and financial condition.
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in the last three years, with
total revenues increasing from $257,000 in 1995 to over $13 million in 1997 and
the total number of employees increasing from seven in 1995 to 141 in 1997. This
expansion has resulted in substantial growth in the scope of the Company's
infrastructure, including operating and financial applications and the
geographic area of its
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<PAGE> 10
operations and customers. Recent rapid growth has placed and, if such growth
continues, is expected to continue to place, a significant strain on the
Company's management and operations. In particular, the Company is in the
process of upgrading its internal financial and reporting systems to enhance
management's ability to obtain and more timely analyze information derived from
its domestic and international operations. There can be no assurance, however,
that the Company's existing or future controls, systems or procedures will be
adequate to support the Company's operations. The Company's ability to manage
its future growth, if any, will require the Company to continually improve its
financial and management controls, reporting systems and procedures on a timely
basis, implement new systems as necessary and expand, train and manage its
employee workforce. There can be no assurance that the Company will be able to
manage any future expansion successfully, and any inability to do so would have
a material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview".
RISKS ASSOCIATED WITH THE EMERGING MARKET FOR AUDITING AND MONITORING SECURITY
PRODUCTS
The market for the Company's products is rapidly evolving. There can be no
assurance that Internet protocols will continue to be used to facilitate
communications or that the market for security monitoring, detection and
response systems in general will continue to expand. Continued growth of this
market will depend, in large part, upon the continued expansion of Internet
usage and in the number of organizations adopting or expanding intranets, the
ability of their respective infrastructures to support an increasing number of
users and services, the public recognition of the potential threat posed by
computer hackers and other unauthorized users and the continued development of
new and improved services for implementation across the Internet and between the
Internet and intranets. If the necessary infrastructure or complementary
products and services are not developed in a timely manner and, consequently,
the market for products to monitor Internet and intranet security fails to grow
or grows more slowly than the Company currently anticipates, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Business -- Industry Background".
Although the demand for Internet security systems and firewalls has grown
in recent years, the market for security monitoring, detection and response
software is still nascent and there can be no assurance that this market will
grow or that, even if the market does grow, businesses will adopt the Company's
products. Historically, network and Internet security monitoring, detection and
response has been addressed by applications and solutions that have largely been
developed by the internal IT departments of organization having large computing
systems with a particular need for such products, including the U.S. Government,
banking and financial institutions, technology firms and universities. In
addition, many organizations do not separately budget for information security
products. The Company has spent, and intends to continue to spend, considerable
resources educating potential customers about the vulnerabilities associated
with their Internet, intranet and networking systems and about the features and
functions of the Company's SAFEsuite products. However, there can be no
assurance that such expenditures will enable SAFEsuite products to achieve any
additional degree of market acceptance, and if the market for SAFEsuite products
fails to grow or grows more slowly than the Company currently anticipates, the
Company's business, operating results and financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing" and " -- Competition".
PRODUCT CONCENTRATION
The Company currently derives a majority of its revenues from software
licenses and related maintenance fees and services for its Internet Scanner
product. In 1997, the Company derived over 80% of its revenues from Internet
Scanner and the Company expects that Internet Scanner-related revenues,
including maintenance contracts, will continue to account for a majority of the
Company's revenues for the foreseeable future. As a result, the Company's future
operating results are dependent upon continued market acceptance of Internet
Scanner and enhancements thereto. There can be no assurance that Internet
Scanner will achieve continued market acceptance or that the Company will be
successful in
9
<PAGE> 11
marketing its SAFEsuite products or product enhancements. A decline in demand
for, or market acceptance of, Internet Scanner as a result of competition,
technological change or other factors would have a material adverse effect on
the Company's business, operating results and financial condition.
INTERNATIONAL OPERATIONS
The Company derived approximately 4% and 21% of its total revenues from
sales to customers outside North America in 1996 and 1997, respectively. The
Company opened sales offices in Belgium in February 1996, Japan in February
1997, England in April 1997, France in April 1997 and Canada in December 1997,
and believes that its future growth will require continued expansion of its
operations in international markets. In order to expand internationally, the
Company must establish additional foreign operations and hire additional
personnel. To the extent that the Company is unable to do so in a timely and
effective manner, the Company's growth, if any, in international sales will be
limited, and the Company's business, operating results and financial condition
could be materially and adversely affected. To date, the Company's revenues from
international operations have primarily been denominated in United States
dollars, although some sales have been denominated in foreign currencies. An
increase in the value of the United States dollar relative to foreign currencies
would make the Company's products more expensive and, therefore, potentially
less competitive in those markets. In addition, even if international operations
are successfully expanded, there can be no assurance that the Company will be
able to maintain or increase international market demand for its products.
The Company's international operations are subject to risks inherent in
international business activities, including, in particular, management of an
organization spread over various countries, longer accounts receivable payment
cycles in certain countries, compliance with a variety of foreign laws and
regulations, unexpected changes in regulatory requirements, overlap of different
tax structures, foreign currency exchange rate fluctuations, import and export
licensing requirements, trade restrictions, changes in tariff and freight rates
and regional economic conditions. There can be no assurance that such factors
will not have a material adverse effect on the Company's future international
sales and, consequently, the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Sales and Marketing".
INCREASING RELIANCE ON INDIRECT DISTRIBUTION CHANNELS
Although direct sales to date have accounted for a majority of the
Company's revenues, ISS expects that it will increasingly distribute its
products to end users through various indirect distribution channels, including
channel partners, value added resellers ("VARs"), original equipment
manufacturers ("OEMs"), Internet service providers ("ISPs") and systems
integrators. The Company's relationships with many of its channel partners have
been established within the last 18 months, and the Company is unable to predict
the extent to which these channel partners will be successful in marketing and
selling licenses for the Company's products. The Company is dependent on the
marketing and sales efforts of these channel partners, many of whom also market
and sell competitive products or are able, under the terms of their agreements,
to market and sell competitive products. The loss of any of the Company's major
channel partners, either to competitive products offered by other companies or
products developed internally by these channel partners, could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, there can be no assurance that the Company will be able
to effectively manage potential conflicts among channel partners, that economic
conditions or industry demand will not adversely affect these or other indirect
channel partners or that these channel partners will not devote greater
resources to marketing and supporting the products of other companies. The
Company's future performance will also depend, in part, on its ability to
attract additional channel partners that will be able to market and support the
Company's products effectively, especially in markets in which the Company has
not previously distributed its products. In addition, the Company depends in
large part upon its channel partners for product installation and support for
such channel partners' customers. There can be no assurance that revenue from
channel partners that accounted for
10
<PAGE> 12
significant revenues in past periods will continue, or if continued will reach
or exceed historical levels. In addition, there can be no assurance that the
Company's channel partners will continue to provide adequate installation and
support to end users or will provide installation and support for new products.
If the Company's channel partners fail to provide adequate installation and
support, end users of the Company's products could cease using, or improperly
implement and operate, such products, which could result in a substantial
increase in customer support costs to the Company and thereby materially
adversely affect the Company's business, operating results and financial
condition. See "Business -- Sales and Marketing".
DEPENDENCE UPON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued service of a relatively small number of key technical and senior
management personnel, especially Thomas E. Noonan, the Company's Chairman of the
Board, President and Chief Executive Officer, and Christopher Klaus, the
Company's founder and Chief Technology Officer, neither of whom is bound by an
employment agreement. The Company's future success also depends on its
continuing ability to attract and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and the Company
has at times in the past experienced difficulty in recruiting qualified
personnel, especially engineers experienced in network security issues. There
can be no assurance that the Company will retain its key managerial and
technical employees or that it will be successful in attracting, assimilating or
retaining other highly qualified technical and managerial personnel in the
future. The loss of any member of the Company's key technical and senior
management personnel or the inability to attract and retain additional qualified
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management".
INTELLECTUAL PROPERTY RIGHTS; USE OF LICENSED TECHNOLOGY; TRADEMARK ISSUES
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software, documentation
and other written materials under the trade secret and copyright laws, which
afford only limited protection. The Company has also submitted one United States
patent application. There can be no assurance that a patent will issue from this
application or, if issued, that such patent would provide meaningful competitive
advantages to the Company. The Company generally licenses SAFEsuite products to
end users in object code (machine-readable) format. Certain customers have
required the Company to maintain a source-code escrow account with a third-party
software escrow agent, and a failure by the Company to perform its obligations
under any of the related license and maintenance agreements, or the insolvency
of the Company, could conceivably cause the release of the Company's source code
to such customers. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as do the laws of the United
States. There can be no assurance that the Company's competitors will not
independently develop similar technology.
Although the Company is not aware that any of its products infringes the
proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments
11
<PAGE> 13
overlaps. Any such claims, with or without merit, could be time consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The name "Internet Security Systems" is currently not subject to trademark
registration in the United States, and may not be a name for which trademark
protection is available due to its general use in a variety of security-related
applications. Although the Company has in the past asserted and intends to
continue to assert its rights with respect to the name "Internet Security
Systems" and has in the past taken and will take action against any use of such
name in a manner that may create confusion for its products in relevant markets,
there can be no assurance that the Company will be successful in such efforts,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Business -- Proprietary Rights
and Trademark Issues".
PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS
The Company's products are used to monitor and enhance network security
which is typically a critical function for organizations. As a result, the
licensing and support of products by the Company may entail the risk of product
liability and related claims. Although the Company's license agreements
typically contain provisions designed to limit the Company's exposure to
potential product liability or related claims, there can be no assurance that
such limitations will be effective under the laws of applicable domestic or
foreign jurisdictions. A product liability claim brought against the Company
could have a material adverse effect upon the Company's business, operating
results and financial condition.
In addition, software products as complex as those offered by the Company
may contain undetected errors or result in failures when first introduced or
when new versions are released. In particular, the personal computer hardware
environment is characterized by a wide variety of non-standard configurations
that make pre-release testing for programming or compatibility errors very
difficult and time-consuming. Despite testing by the Company and by current and
potential customers, there can be no assurance that errors will not be found in
new products or enhancements after commencement of commercial shipments. The
occurrence of these errors could result in adverse publicity, loss of or delay
in market acceptance or claims by customers against the Company, any of which
could have a material adverse effect upon the Company's business, operating
results and financial condition. See "Business -- Products" and "-- Product
Development".
RISK OF TARGETED ATTACKS AGAINST THE COMPANY
Due to the Company's notoriety in monitoring, detecting and thwarting the
activities of computer hackers, the Company in the past has been, and expects in
the future that it will continue to be, a target of attacks by computer hackers
who seek to infiltrate the Company's internal network system to obtain sensitive
data and information or create bugs or viruses in an attempt to sabotage the
functionality of the Company's products. There can be no assurance that the
Company will be able to respond to such attacks in a timely or effective manner
and any failure to do so could have a material adverse effect upon the Company's
business, operating results and financial condition.
GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS
A number of governments have imposed controls, export license requirements
and restrictions on the export of certain technology, specifically with respect
to encryption technology. Although the Company has incorporated encryption
technology into its products, the Company has been able to receive prior
approvals or authorizations to sell its products in foreign markets. There can
be no assurance, however, that current export controls will not be extended to
cover the Company's products which may have a material adverse effect on the
Company's business, operating results and financial condition.
12
<PAGE> 14
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
upon completion of the Offering or, if it does develop, that such market will be
sustained. The initial public offering price of the Common Stock will be
determined by negotiation between the Company and the representatives of the
Underwriters, and may not be representative of the price that will prevail in
the open market. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
The market price of the Common Stock after the Offering may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological innovation
by the Company or its competitors, quarterly variations in the Company's results
of operations, and general market conditions or market conditions specific to
particular industries. In particular, the stock prices for many companies in the
technology and emerging growth sector have experienced wide fluctuations which
have often been unrelated to the operating performance of such companies. Such
fluctuations may adversely affect the market price of the Common Stock.
Furthermore, in the past, following periods of volatility in the market price of
a company's securities, securities class action claims have been brought against
the issuing company. There can be no assurance that such litigation will not
occur in the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, and
any adverse determination in such litigation could also subject the Company to
significant liabilities, any or all of which could have a material adverse
effect on the Company's business, operating results and financial condition.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Charter") and the
Company's Bylaws (the "Bylaws") contain certain provisions that may have the
effect of discouraging, delaying or preventing a change in control of the
Company or unsolicited acquisition proposals that a stockholder might consider
favorable. The Charter provides the Company's Board of Directors with the
authority to issue up to 50,000,000 shares of Common Stock, and up to 20,000,000
shares of Preferred Stock in one or more series and to determine the price,
rights (including voting rights), preferences, privileges and restrictions of
each such series of Preferred Stock, without any vote or action by the Company's
stockholders. The rights and preferences of any series of such Preferred Stock
could include a preference over the Common Stock on the distribution of the
Company's assets upon a liquidation or sale of the Company, preferential
dividends, redemption rights, the right to elect one or more directors and other
voting rights. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any series of
Preferred Stock that may be issued in the future. The Company has no current
plans to issue Preferred Stock. The existence of large amounts of authorized but
unissued Common Stock could be used to prevent or delay a change in control of
the Company. In addition, the Charter and Bylaws include provisions establishing
a Board of Directors with staggered, three-year terms, requiring supermajority
voting to effect certain amendments to the Charter and Bylaws, limiting the
persons who may call special meetings of stockholders, prohibiting stockholder
action by written consent and establishing advance notice requirements for
nominations for election to the Board of Directors or for proposing matters that
can be acted upon at stockholders' meetings. Certain provisions of Delaware law
and the Company's Restated 1995 Stock Incentive Plan (the "1995 Plan") may also
have the effect of discouraging, delaying or preventing a change in control of
the Company or unsolicited acquisition proposals. See "Management -- Restated
1995 Stock Incentive Plan" and "Description of Capital Stock -- Certain
Anti-Takeover, Limited Liability and Indemnification Provisions".
13
<PAGE> 15
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of the Common Stock or the ability of the Company to raise capital
through a public offering of its equity securities. Upon completion of the
Offering, the Company will have outstanding 15,878,428 shares of Common Stock
(not including shares issuable upon exercise of outstanding stock options).
Under agreements entered into between the representatives of the Underwriters
and each of the Company's officers, directors, principal stockholders and their
respective affiliates (the "Lock-Up Agreements") who beneficially hold, in the
aggregate 13,678,428 shares of Common Stock (which includes 20,000 shares
acquired in 1998 upon the exercise of a stock option held by a Selling
Stockholder) prior to the Offering, no shares held by such holders will be
eligible for sale in the public market for a period of 180 days following the
date of this Prospectus. The Company intends to file a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), covering
the sale of Common Stock reserved for issuance under the 1995 Plan. As of
December 31, 1997, there were options outstanding under the 1995 Plan to
purchase an aggregate of 1,803,850 shares and options issued outside of the 1995
Plan to purchase 80,000 shares; all shares acquired upon exercise of options
within 180 days of the Offering are or will be subject to Lock-Up Agreements as
required under the 1995 Plan. Following the expiration of the 180-day term of
the Lock-Up Agreements, 16,359,365 shares, including the 2,500,000 shares
offered hereby and approximately 480,937 shares subject to options that will be
exercisable on or before the end of such term, will be eligible for sale in the
public market subject, in some cases, to the requirements of Rule 144 or Rule
701 under the Securities Act. Goldman, Sachs & Co. in its sole discretion and at
any time without notice, may release all or any portion of the securities
subject to the Lock-Up Agreements. Any such decision to release securities would
likely be based upon individual stockholder circumstances, prevailing market
conditions and other relevant factors. Any such release could have a material
adverse effect upon the price of the Common Stock. See "Underwriting".
Holders of the 5,736,957 shares of Common Stock that will be issued upon
the conversion of the outstanding shares of Convertible Preferred Stock upon the
consummation of the Offering are currently entitled to certain demand and
piggy-back registration rights with respect to such shares and holders of an
additional 7,901,971 shares of Common Stock are currently entitled to piggy-back
registration rights. If the Company were required to register the shares held by
such holders pursuant to the exercise of their demand or piggy-back registration
rights, such sales could have an adverse effect upon the Company's ability to
raise needed capital. See "Shares Eligible for Future Sale".
CONCENTRATION OF SHARE OWNERSHIP
Upon completion of the Offering, the directors, executive officers and
principal stockholders of the Company and their respective affiliates will
beneficially own approximately 74.4% of the outstanding Common Stock
(approximately 72.7% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. See "Principal and Selling Stockholders".
DISCRETION AS TO USE OF PROCEEDS
The Company has not yet identified specific uses of a significant portion
of the net proceeds from the Offering. Therefore, the Company's management will
retain broad discretion to allocate the net proceeds from the Offering to uses
that the stockholders may not deem desirable, and there can be no assurance that
the proceeds can or will yield a significant return. See "Use of Proceeds".
14
<PAGE> 16
IMMEDIATE AND SUBSTANTIAL DILUTION
The midpoint of the filing range of the initial public offering price is
substantially higher than the book value per share of the outstanding Common
Stock. As a result, investors purchasing Common Stock in the Offering will incur
immediate and substantial dilution of the net tangible book value per share of
the Common Stock of $8.51 from such mid-point of the filing range. In addition,
the Company has issued options to acquire Common Stock at prices significantly
below the mid-point of the filing range of the initial public offering price. To
the extent such outstanding options are exercised, there will be further
dilution to investors in the Offering. See "Dilution".
15
<PAGE> 17
USE OF PROCEEDS
Based on an assumed initial public offering price of $10.00 per share, the
net proceeds from the sale of shares of Common Stock to be sold by the Company
will be approximately $19,760,000 (approximately $22,643,000 if the Underwriters
exercise their over-allotment option in full) after deduction of estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Common Stock, to facilitate future
access by the Company to public equity markets, to provide liquidity to certain
of the Company's existing stockholders and to provide increased visibility and
credibility to the Company in a marketplace where many of its competitors are
publicly-held companies.
The Company currently intends to use the net proceeds of the Offering for
working capital and general corporate purposes, including financing accounts
receivable and capital expenditures made in the ordinary course of its business,
as well as for possible acquisitions of businesses, products and technologies
that are complementary to those of the Company. Although the Company has not
identified any specific businesses, products or technologies that it may
acquire, nor are there any current agreements or negotiations with respect to
any such transactions, the Company from time to time evaluates such
opportunities. Pending such uses, the net proceeds will be invested in
government securities and other short-term, investment-grade, interest-bearing
instruments. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock other than a $10,000 dividend paid in each of 1994 and 1995, and does not
intend to pay any cash dividends on its Common Stock in the foreseeable future.
The Company's bank credit facility currently permits the payment of cash
dividends only to the extent that the Company maintains certain financial ratios
and a specified minimum net worth. For a description of the Company's credit
facility, see Note 3 of Notes to Consolidated Financial Statements.
16
<PAGE> 18
DILUTION
At December 31, 1997, the pro forma net tangible book value of the Company
was approximately $3,820,000, or $0.28 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total tangible assets of
the Company reduced by the amount of its total liabilities, divided by the
number of shares of Common Stock outstanding after giving effect to the
mandatory conversion of all shares of Convertible Preferred Stock upon the
consummation of the Offering. After giving effect to the issuance by the Company
of the 2,200,000 shares offered hereby at an assumed initial public offering
price of $10.00 per share and the receipt of the estimated net proceeds
therefrom, the pro forma as adjusted net tangible book value of the Company as
of December 31, 1997 would have been approximately $23,580,000, or $1.49 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value of $1.21 per share to existing stockholders and an immediate
dilution of $8.51 per share to new investors purchasing shares of Common Stock
in the Offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of December
31, 1997............................................... $0.28
Increase per share attributable to new investors.......... 1.21
-----
Pro forma as adjusted net tangible book value per share
after the Offering........................................ 1.49
------
Dilution per share to new investors in the Offering......... $ 8.51
======
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1997, with respect to existing stockholders and new investors in the Offering, a
comparison of the number of shares of Common Stock acquired from the Company,
the percentage of ownership of such shares, the total cash consideration paid,
the percentage of total cash consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... 13,658,428 86.1% $ 9,080,000 29.2% $ 0.66
New investors(1)................... 2,200,000 13.9 22,000,000 70.8 10.00
----------- ----- ----------- -----
Total.................... 15,858,428 100.0% $31,080,000 100.0%
=========== ===== =========== =====
</TABLE>
- ---------------
(1) The net effect of sales by the Selling Stockholders in the Offering will be
to reduce the number of shares held by existing stockholders to 13,378,428
shares, or 84.3% of the total number of shares of Common Stock outstanding
after the Offering, and to increase the number of shares held by new
investors to 2,500,000 shares, or 15.7% of the total number of shares of
Common Stock outstanding after the Offering.
The preceding table assumes no exercise of any stock options outstanding as
of December 31, 1997, except for 20,000 shares that were acquired by a Selling
Stockholder in January 1998 upon the exercise of a stock option with an exercise
price of $0.15 per share, which shares will be sold in the Offering. As of
December 31, 1997, there were stock options outstanding to purchase a total of
1,883,850 shares of Common Stock with a weighted average exercise price of $2.71
per share, all of which are exercisable, and 1,189,150 additional shares
reserved for issuance under the 1995 Plan.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth, as of December 31, 1997, the cash position
and capitalization of the Company (i) on a historical basis; (ii) on a pro forma
basis, giving effect to the conversion of each share of Convertible Preferred
Stock into one share of Common Stock, which will occur upon the consummation of
the Offering; and (iii) on a pro forma basis, as adjusted to give effect to the
sale of the Common Stock offered hereby and the receipt of the estimated net
proceeds therefrom as described under "Use of Proceeds".
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 3,929 $ 3,929 $23,689
======= ======= =======
Long-term debt, less current portion(1)..................... $ 70 $ 70 $ 70
Redeemable, Convertible Preferred Stock, $0.001 par value,
5,736,957 shares authorized............................
Series A Redeemable, Convertible Preferred Stock,
3,650,000 shares authorized, 3,650,000 shares issued
and outstanding (historical) and none issued or
outstanding (pro forma and pro forma as adjusted).... 3,621 -- --
Series B Redeemable, Convertible Preferred Stock,
2,086,957 shares authorized, 2,086,957 shares issued
and outstanding (historical), and none issued or
outstanding (pro forma and pro forma as adjusted).... 5,257 -- --
Stockholders' equity (deficit):
Preferred Stock, $0.001 per value, 20,000,000 shares
authorized, none issued or outstanding(2).............. -- -- --
Common Stock, $0.001 par value, 50,000,000 shares
authorized, 7,921,471 shares (historical), 13,658,428
shares (pro forma) and 15,858,428 shares (pro forma as
adjusted) issued and outstanding, respectively(3)...... 8 14 16
Additional paid-in capital................................ 124 8,996 28,754
Accumulated deficit....................................... (5,190) (5,190) (5,190)
------- ------- -------
Total stockholders' equity (deficit)................... (5,058) 3,820 23,580
------- ------- -------
Total capitalization........................................ $(4,988) $ 3,890 $23,650
======= ======= =======
</TABLE>
- ---------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) The 20,000,000 shares of authorized Preferred Stock includes 3,650,000
shares designated as Series A Convertible Preferred Stock and 2,086,957
shares designated as Series B Convertible Preferred Stock.
(3) Pro forma and pro forma as adjusted Common Stock excludes 1,883,850 shares
issuable upon the exercise of outstanding options as of December 31, 1997,
and an additional 1,189,150 shares reserved for future issuance as of
December 31, 1997 pursuant to the 1995 Plan. See "Management -- Restated
1995 Stock Incentive Plan," "Certain Transactions" and Note 6 of Notes to
Consolidated Financial Statements.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company is
qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and Notes thereto and the other financial
information appearing elsewhere in this Prospectus. The financial data set forth
below for each of the three years in the period ending December 31, 1997, and as
of December 31, 1996 and 1997, has been derived from the audited Consolidated
Financial Statements of the Company appearing elsewhere in this Prospectus. The
financial data for the period from inception (April 19, 1994) through December
31, 1994, and as of December 31, 1994 and 1995, has been derived from audited
financial statements of the Company not included in this Prospectus. Historical
results are not necessarily indicative of the results that may be expected in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
APRIL 19, 1994
(INCEPTION) YEAR ENDED DECEMBER 31,
THROUGH ---------------------------
DECEMBER 31, 1994 1995 1996 1997
----------------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses..................................... $ 38 $ 246 $ 4,233 $10,936
Support services............................. -- 11 229 2,531
------ ------- ------- -------
38 257 4,462 13,467
Costs and expenses:
Cost of revenues............................. -- 4 18 676
Research and development..................... 5 97 1,225 3,434
Sales and marketing.......................... 11 252 3,768 11,731
General and administrative................... 2 44 656 1,773
------ ------- ------- -------
18 397 5,667 17,614
------ ------- ------- -------
Operating income (loss)........................ 20 (140) (1,205) (4,147)
Interest income, net........................... -- -- 74 228
------ ------- ------- -------
Net income (loss).............................. $ 20 $ (140) $(1,131) $(3,919)
====== ======= ======= =======
Unaudited pro forma net loss per share(1)...... $ (0.28)
=======
Unaudited weighted average shares used in per
share calculation(2)......................... 14,181
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 9 $ 6 $ 2,007 $ 3,929
Working capital (working capital deficit).............. 10 (26) 2,298 2,272
Total assets........................................... 10 176 4,380 9,866
Long-term debt, net of current portion................. -- -- 140 70
Convertible Preferred Stock............................ -- -- 3,614 8,878
Stockholders' equity (deficit)......................... 10 (7) (1,160) (5,058)
</TABLE>
- ---------------
(1) Computed on the basis described in Note 1 of Notes to Consolidated Financial
Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for the
determination of shares used in computing unaudited pro forma net loss per
share. Pro forma net loss per share is not included for periods prior to
1997 because such comparisons are not meaningful due to the conversion of
all outstanding shares of Convertible Preferred Stock to Common Stock upon
consummation of the Offering.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Internet Security Systems is the leading provider of network security
monitoring, detection and response software that protects the security and
integrity of enterprise information systems. The Company's products rely on an
innovative Adaptive Security Management ("ASM") approach to network security
which entails continuous security risk monitoring and response to develop an
active and informed network security policy. From inception through December 31,
1995, the Company was considered to be in the development stage with activities
primarily related to raising capital, recruiting personnel, conducting research
and development activities, purchasing operating assets, building the Internet
Security Systems identity and establishing the market for ASM products. During
1996 and 1997, the Company continued to invest in research and development,
expand its marketing activities, build domestic and international sales channels
and develop its general and administrative infrastructure.
Historically, the Company has generated substantially all its revenues from
the license and related maintenance of its SAFEsuite products. In particular,
most of the Company's revenues to date have been generated from the Company's
Internet Scanner product, which was first introduced in 1992 and is currently
offered in version 5.0. RealSecure, introduced in the fourth quarter of 1996,
and System Security Scanner ("S3"), introduced in the first quarter of 1997,
have generated lesser amounts of revenue for the Company. The Company has also
derived a small portion of its revenue from responses to customer requests for
training and implementation services, on a time and materials basis, to assist
in the successful deployment of its products within customer networks,
development of customers' security policies and assessing the effectiveness of
security policy decisions. The Company believes that each of its current
products and products in development, together with professional services, will
represent important revenue sources in the future.
The Company recognizes its license revenue upon (i) delivery of software
or, if the customer has evaluation software, delivery of the software key, and
(ii) issuance of the related license, assuming that no significant vendor
obligations or customer acceptance rights exist. In October 1997, the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 97-2, Software Revenue Recognition, which the Company adopted, effective
January 1, 1997. Such adoption had no effect on the Company's methods of
recognizing revenue from its license and maintenance activities. Prior to 1997,
the Company's revenue policy was in accordance with the preceding authoritative
guidance provided by SOP No. 91-1, Software Revenue Recognition. Revenues from
perpetual licenses are recorded as license revenues in the statements of
operations. Support service revenues include maintenance, term license revenues
and professional services. Maintenance is a separate component of each contract
and is recognized ratably over the contract term. Term licenses, which allow
customer use of the product and maintenance for a specified period, generally
twelve months, are also recognized ratably over the contact term. Professional
services revenues are recognized as such services are performed. Research and
development expenditures have been charged to operations as incurred. The
Company has not capitalized any such development costs under Statement of
Financial Accounting Standards ("SFAS") No. 86.
Pricing is based on the number of devices or engines being managed by the
customer, scaled to provide discounts when the managed system is larger or
several SAFEsuite products are licensed concurrently. Annual maintenance, which
is virtually always purchased in conjunction with the licensing of a product, is
a separate component that is offered for a fee generally equal to 20% of the
perpetual
20
<PAGE> 22
license fee and recognized ratably over the contract term. Maintenance packages
typically include telephone support, product updates, access to the Company's
security advisory notices and error corrections. ISS recommends that its
customers renew their maintenance contracts and, to date, most customers have
done so. Because of the dynamic nature of vulnerabilities and threats to
distributed computing environments, the Company's ongoing program of security
updates and increased awareness created by the Company's products, the Company
believes that a substantial majority of its customers will continue to renew
their maintenance contracts.
Licenses originate principally from the Company's direct sales force and
telephone sales operations. Indirect sales channels, including resellers,
security consultants, ISPs and OEMs that incorporate the Company's products into
their own product offerings, are also important sources of revenues. Indirect
channels provide less revenue per license to ISS since the channel partners
usually receive discounts ranging from 35% to 50% of list price.
The Company's business has grown rapidly in the last three years, with
total revenues increasing from $257,000 in 1995 to $13.5 million in 1997.
However, ISS has experienced net losses in each of these years and, as of
December 31, 1997, had an accumulated deficit of $5.2 million. These losses
resulted from significant costs incurred in the development and sale of the
Company's products and services. During this period, the number of ISS employees
increased from seven at December 31, 1995 to 141 at December 31, 1997. The
Company currently expects to expand its sales and marketing operations, to
continue an aggressive international expansion, to increase its investment level
in product development and its proprietary database, and to improve its internal
operating and financial infrastructure in support of the Company's business
plan, all of which will increase operating expenses. As a result, ISS expects to
continue to incur losses for the foreseeable future.
Because the market for the Company's products has only recently emerged,
period-to-period comparisons of its operating results are not meaningful.
Although ISS has experienced significant revenue growth recently, there can be
no assurance that such growth rates are sustainable and they should not be
relied upon as predictive of future performance. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. There can be no assurance that
the Company will be successful in addressing such risks and difficulties or that
ISS will achieve profitability in the future. See "Risk Factors -- Limited
Operating History; History of Losses","--Significant Potential Fluctuations in
Operating Results" and " -- Management of Growth".
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain consolidated historical operating
information for the Company, as a percentage of total revenues, for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Revenues:
Licenses.................................................. 95.7% 94.9% 81.2%
Support services.......................................... 4.3 5.1 18.8
------ ------ -----
100.0 100.0 100.0
Costs and expenses:
Cost of revenues.......................................... 1.6 0.4 5.0
Research and development.................................. 37.7 27.5 25.5
Sales and marketing....................................... 98.1 84.4 87.1
General and administrative................................ 17.1 14.7 13.2
------ ------ -----
154.5 127.0 130.8
------ ------ -----
Operating loss.............................................. (54.5) (27.0) (30.8)
Interest income, net........................................ -- 1.7 1.7
------ ------ -----
Net loss.................................................... (54.5)% (25.3)% (29.1)%
====== ====== =====
</TABLE>
REVENUES
The Company's revenues increased from $257,000 in 1995, to $4.5 million in
1996 and to $13.5 million in 1997. During these periods, Internet Scanner was
the Company's primary revenue-generating product with license revenues
accounting for approximately 96%, 93% and 66% of the Company's total revenues in
1995, 1996 and 1997, respectively. Maintenance revenue related to all licenses
and annual contracts for product usage and support accounted for approximately
4%, 5% and 18% of total revenues in 1995, 1996 and 1997, respectively. The
balance of revenues originated from the Company's more recent product offerings,
S3 and RealSecure, and professional services provided on a time and materials
basis. The Company had no customer that accounted for more than 10% of its
revenues in 1997. The Company recognized over 95% of its revenues in 1995 and
1996 from sales to customers within North America; however, international
operations were significantly expanded in 1997 and represent an increasing
source of the Company's revenues. In 1997, revenues from customers outside North
America were $2.8 million, representing approximately 21% of total revenues.
COST OF REVENUES
Cost of revenues includes packaging and distribution costs for the
Company's software products which, since the Company uses the Internet to
provide product updates and keys necessary to activate a customer's software, is
a minor cost. This category also includes the costs related to the Company's
professional services offerings, which were provided by a dedicated employee
group beginning in 1997 and is expected to be an area of future personnel growth
in 1998. Gross margins were 98.4% in 1995, 99.6% in 1996 and 95.0% in 1997. The
Company's gross margins will decline in future years if, as anticipated,
professional services become a more significant portion of the Company's
business.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of salary and related costs of
the Company's research and development personnel, including costs for employee
benefits, computer equipment and support services used in product and technology
development. This includes the "X-Force", a team composed of security experts
dedicated to understanding, documenting and coding new vulnerability checks,
real-time threats and attack signatures and solutions to global security issues.
The Company believes that this primary research, which aids in the design of new
products and product enhancements to respond to an ever-changing risk profile,
is an essential ingredient for retaining its leadership position in its
marketplace.
22
<PAGE> 24
Accordingly, the Company has increased its research and development expenses
from $97,000 in 1995, to $1.2 million in 1996 and to $3.4 million in 1997,
representing approximately 38%, 27% and 25% of revenues, respectively. ISS
expects that research and development expenses will continue to increase in
absolute dollars, and approximate the 1997 level as a percentage of revenues, as
the Company recruits and hires additional experienced security experts and makes
other investments in research and development.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and travel,
commissions, advertising, maintenance of the ISS Web site, trade show expenses,
personnel recruiting costs and costs of marketing materials. Sales and marketing
expenses were $252,000 in 1995, $3.8 million in 1996 and $11.7 million in 1997,
representing approximately 98%, 84% and 87% of total revenues, respectively.
This increase in absolute dollars is primarily the result of a significant
increase in the number of regional United States sales locations, increased
commissions commensurate with increased direct sales revenues and expanded
international operations in the Europe and Asia/Pacific regions. The Company
anticipates that sales and marketing expenses will continue to increase in
absolute dollars, but decrease as a percentage of revenues, as it continues to
expand its direct sales force and telephone sales operations and hires
additional marketing and business development personnel to promote its indirect
sales distribution channels.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $44,000 in 1995, $656,000 in 1996
and $1.8 million in 1997, representing approximately 17%, 15% and 13% of
revenues, respectively. Such expenses consisted primarily of salaries and
personnel and related costs for the Company's executive, administrative, finance
and human resources personnel, support services and professional services fees.
The Company anticipates that these expenses will approximate 1997 levels as a
percentage of revenues, but will increase in absolute dollars in 1998 as it
upgrades internal and financial reporting systems to enhance management's
ability to obtain and analyze information about its domestic and international
operations. Also, the Company anticipates additional costs related to being a
public company, including annual and other public reporting costs, directors'
and officers' liability insurance, investor relations programs and professional
services fees.
INCOME TAXES
No provision for federal, state or foreign income taxes has been recorded
because the Company has experienced cumulative net losses since inception. As of
December 31, 1997, ISS had net operating loss carryforwards of approximately
$3.9 million for federal tax purposes which will expire, if not utilized, in
2011 and 2012. The Company also has approximately $295,000 of net operating loss
carryforwards related to its foreign operations which will expire, if not
utilized, in 2011. The Company has not recognized any benefit from the future
use of such loss carryforwards because management's evaluation of all the
available evidence in assessing the realizability of the tax benefits of such
loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize such tax benefits currently.
23
<PAGE> 25
SELECTED QUARTERLY FINANCIAL RESULTS
The following tables set forth unaudited consolidated statement of
operations data for the eight quarters ended December 31, 1997, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited interim consolidated
financial statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Licenses.................... $ 360 $ 885 $ 940 $2,048 $1,872 $2,150 $ 2,767 $ 4,147
Support services............ 8 19 88 114 353 521 706 951
------ ------ ------ ------ ------ ------ ------- -------
368 904 1,028 2,162 2,225 2,671 3,473 5,098
Costs and expenses:
Cost of revenues............ 1 4 2 11 87 137 176 276
Research and development.... 176 275 332 442 493 569 895 1,477
Sales and marketing......... 242 871 965 1,690 1,754 2,342 3,051 4,584
General and
administrative............ 95 153 155 253 320 301 443 709
------ ------ ------ ------ ------ ------ ------- -------
514 1,303 1,454 2,396 2,654 3,349 4,565 7,046
------ ------ ------ ------ ------ ------ ------- -------
Operating loss................ (146) (399) (426) (234) (429) (678) (1,092) (1,948)
Interest income, net.......... 18 29 15 12 35 68 66 59
------ ------ ------ ------ ------ ------ ------- -------
Net loss...................... $ (128) $ (370) $ (411) $ (222) $ (394) $ (610) $(1,026) $(1,889)
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Licenses.................... 97.8% 97.9% 91.4% 94.7% 84.1% 80.5% 79.7% 81.3%
Support services............ 2.2 2.1 8.6 5.3 15.9 19.5 20.3 18.7
------ ------ ------ ------ ------ ------ ------- -------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenues............ 0.3 0.4 0.2 0.5 3.9 5.1 5.1 5.4
Research and development.... 47.8 30.4 32.3 20.4 22.2 21.3 25.8 29.0
Sales and marketing......... 65.8 96.4 93.9 78.2 78.8 87.7 87.8 89.9
General and
administrative............ 25.8 16.9 15.1 11.7 14.4 11.3 12.7 13.9
------ ------ ------ ------ ------ ------ ------- -------
139.7 144.1 141.5 110.8 119.3 125.4 131.4 138.2
------ ------ ------ ------ ------ ------ ------- -------
Operating loss................ (39.7) (44.1) (41.5) (10.8) (19.3) (25.4) (31.4) (38.2)
Interest income, net.......... 4.9 3.2 1.5 0.5 1.6 2.6 1.9 1.1
------ ------ ------ ------ ------ ------ ------- -------
Net loss...................... (34.8)% (40.9)% (40.0)% (10.3)% (17.7)% (22.8)% (29.5)% (37.1)%
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
During the Company's short history, its operating results have varied on a
quarterly basis and may fluctuate significantly in the future on a quarterly and
annual basis as a result of a combination of factors. These factors include the
level of demand for the Company's products, the volume and timing of orders, the
level of product and price competition, the Company's ability to expand its
domestic and international
24
<PAGE> 26
sales and marketing organizations, the ability to develop new and enhanced
products, the ability to attract and retain key technical, sales and managerial
personnel, the growth in acceptance of and activity on the Internet by corporate
and government users, the level of growth of intranets, the extent to which
unauthorized access and use of online information is perceived as a threat to
network security, customer budgets, seasonal trends in customer purchasing,
foreign currency exchange rates and general economic factors. In addition, the
amount of revenues associated with particular licenses can vary significantly
based upon the number of products licensed and the number of devices involved in
the installation. The Company has experienced, and may continue to experience
from time to time, large individual license sales which can cause significant
variability in license revenues and results of operations for any particular
period. The timing of significant orders is unpredictable and, like many
software companies, the Company typically realizes a significant portion of
software license revenues in the last month of the quarter. The Company
establishes its expenditure levels for product development, sales and marketing
and other operating expenses based, in large part, on its expected future
revenues. As a result, if revenues fall below expectations, operating results
are likely to be adversely and disproportionately affected because only a small
portion of the Company's expenses vary with revenues.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through sales of its equity securities in private placements. In February 1996
and February 1997, the Company received aggregate net proceeds of $8.9 million
from the sale of Convertible Preferred Stock, which shares will automatically
convert into Common Stock upon consummation of the Offering.
Net cash used in operating activities of approximately $1.6 million for the
year ended December 31, 1997 resulted from $3.9 million in net operating losses
partially offset by a decrease in working capital. Although revenue growth
increased accounts receivable by $2.1 million in 1997, working capital decreased
as accounts payable and accrued expenses grew $2.7 million and deferred revenues
increased $1.5 million. The increase in deferred revenues was attributable to
the growth of maintenance contracts and term licenses, which are recognized
ratably as revenue over the contract term.
Cash provided by financing activities of $5.2 million in 1997 consisted
primarily of the proceeds from the issuance of Convertible Preferred Stock which
has been invested in short-term investments. Purchase of computer equipment used
in conducting the Company's business represented the primary component of cash
used in investing activities.
As of December 31, 1997, the Company had $3.9 million of cash and cash
equivalents. The Company believes that the net proceeds of this Offering,
together with existing cash, cash equivalents and short-term investments, will
be sufficient to fund its anticipated operating losses and to meet its working
capital and anticipated capital expenditures for at least the next 12 months.
The Company currently intends to use the net proceeds of the Offering for
working capital and general corporate purposes, including financing accounts
receivable and capital expenditures made in the ordinary course of its business,
as well as for possible acquisitions of businesses, products and technologies
that are complementary to those of the Company. Although the Company has not
identified any specific businesses, products or technologies that it may
acquire, nor are there any current agreements or negotiations with respect to
any such transactions, the Company from time to time evaluates such
opportunities. Pending such uses, the net proceeds will be invested in
government securities and other short-term, investment-grade, interest-bearing
instruments.
25
<PAGE> 27
BUSINESS
OVERVIEW
Internet Security Systems is the leading provider of network security
monitoring, detection and response software that protects the security and
integrity of enterprise information systems. The Company's SAFEsuite family of
products enforces "best practice" information protection automatically across
distributed computing environments by monitoring and responding to continuously
changing network security risks. By dynamically detecting and responding to the
security vulnerabilities and real-time threats inherent in open systems,
SAFEsuite products protect distributed computing environments, including
internal corporate networks, extranets and the Internet, from attacks, misuse
and security policy violations. The Company's products rely on an innovative
Adaptive Security Management ("ASM") approach to network security, which entails
continuous security risk monitoring and response to develop and enforce an
active network security policy. ISS pioneered the technology for vulnerability
and threat detection through a dedicated security research and development team
and believes that it has the most comprehensive vulnerability and threat
database in existence. The Company has delivered its network security
monitoring, detection and response solutions to over 1,500 organizations
worldwide, including firms in the Global 2000, U.S. and international government
agencies and major universities. Nine of the ten largest commercial banks in the
United States have licensed the Company's products.
INDUSTRY BACKGROUND
The rise of client/server computing in recent years has driven the need for
connectivity beyond local area networks ("LANs") to enterprise-wide networks
spanning multiple LANs and wide area networks ("WANs"). Concurrently with the
shift to distributed computing architectures, the use of the Internet by
organizations has grown dramatically, driven largely by the development of the
Web and graphically intuitive browsers, the proliferation of multimedia personal
computers and the emergence of compelling Web-based content and commerce
applications. International Data Corporation ("IDC") estimated in a July 1997
report that at the end of 1997 there would be over 29 million Web users in the
United States and over 50 million users worldwide, with the number expected to
increase to 94 million in the United States and 175 million worldwide by the end
of 2001. Additionally, IDC estimates that the number of devices accessing the
Web will increase from 64 million at the end of 1997 to 331 million by the end
of 2001.
Growth of the Internet has to date been fueled primarily by the increased
use of e-mail, general information browsing and the exchange of non-sensitive
data. However, organizations are increasingly connecting their enterprise
networks to the Internet to extend beyond these limited uses, thus facilitating
and supporting a number of more valuable and sensitive activities, including
business-to-business transactions, electronic data interchange (EDI), Web-based
access to account and benefits information, secure messaging and online retail
purchases and payments. The proliferation of client/server architectures and the
growth of the Internet as a business tool has led to the emergence of
"intranets" -- private enterprise information systems that use Internet
protocols ("IP") and applications to share information and services both within
and outside the enterprise network. As a result, businesses are able to share
internal information and to run enterprise applications across geographically
dispersed facilities, and customers, remote employees, suppliers and other
business partners are able to inexpensively link into each other's enterprise
information systems. In its July 1997 report, IDC projected that 9 million users
in the U.S. and 16 million users worldwide had bought or would buy goods or
services in Web-based transactions during 1997, with that number expected to
grow to 42 million and 68 million users, respectively, by 2001. In addition, IDC
estimates that commerce over the Internet will grow from less than $11 billion
in 1997 to more than $223 billion in 2001.
THE NEED FOR NETWORK SECURITY
Although open computing environments have many business advantages, their
accessibility and the relative anonymity of users makes these systems, and the
integrity of the information that is stored on them, vulnerable to security
threats. Distributed computing systems contain an organization's mission-
26
<PAGE> 28
critical applications, such as payroll, financial reports, customer and supplier
records and manufacturing and engineering designs. The advent and widespread
adoption of open systems, together with their inherent vulnerabilities, present
inviting opportunities for computer hackers, curious or disgruntled employees,
contractors and competitors to compromise or destroy sensitive information
within the system or to otherwise disrupt the normal operation of the system. In
addition, client/server computing environments are inherently complex, typically
involving a variety of hardware, operating systems, networking protocols and
applications supplied by a multitude of vendors, making these networks difficult
to manage, monitor and protect from unauthorized access. Each application,
operating system and device introduced to a network contains additional
vulnerabilities that may be exploited by an unauthorized network user. Newly
introduced versions of products like Windows NT and Sun Solaris, which are
designed to maximize connectivity both within and among networks, create many
more new vulnerabilities. To adequately secure a network, IT managers must have
the resources to not only correctly configure the security measures in each
system, but also to understand risks created by any change to existing systems
on the network. Exacerbating this situation is the limited supply of personnel
knowledgeable in information security issues.
These factors create an urgent need for enterprises to protect their
information systems from unauthorized access and misuse. The security risks are
real. According to the 1997 Annual Information Week/Ernst & Young LLP
Information Security Survey of IT managers and professionals, 42% of all United
States respondents reported malicious acts from external sources, up from 16% in
the previous year, 43% reported malicious acts from employees as compared to 29%
in the previous year, and 55% reported insufficient IT professionals to monitor
network security. Despite the convenience and the compelling economic incentives
for the use of IP networks, they cannot reach their full potential as a platform
for global communication and commerce until the current lack of security
associated with these networks is adequately resolved.
Organizations have generally responded to perceived security threats by
implementing passive point tools designed to protect individual components of
their internal networks from unauthorized use or outside attacks. Some security
concerns are being addressed through encryption, firewalls and other
technologies, but these technologies can be circumvented. Encryption protects
information during transmission, but it does not typically protect information
at either the source or the destination. A "firewall" controls the flow of data
between an internal network and outside networks or the Internet. While
firewalls are necessary for access control, they must be initially configured,
and regularly reconfigured, to accommodate new applications, users and business
partners on the network, each of which creates additional risks. Furthermore,
firewalls are vulnerable to hackers and others seeking to compromise network
integrity and fail to protect against an improper use of the systems by internal
authorized users within the network. In addition to encryption and firewalls,
many organizations deploy operating system security mechanisms, such as user
authentication, passwords and multi-level access rights, to prevent unauthorized
access to information by external as well as internal users. Implementation
issues such as easily-guessed passwords or default accounts left on newly
installed devices diminish the effectiveness of these measures. Passive point
tools do not address the fundamental issue that "open" systems are, by
definition, open and that their inherent utility is itself the source of their
vulnerability. This conflict between the benefits of open systems and the risks
of their unauthorized use or disruption has not been widely recognized or
addressed by IT managers.
To be effective, passive point tools that secure specific elements of an
enterprise network need to be coordinated through an enterprise-wide computer
security policy with systems to automatically enforce and evaluate the
effectiveness of that policy. Many organizations have developed security
policies that address the appropriate use of network resources, the proper
configuration of network services, operating systems and applications and
actions to be taken if there is a violation of such policy or an attack on the
network; however, such organizations have not had the systems to automatically
enforce and implement such policies across their entire IT infrastructure.
Without such systems, the dynamic nature of enterprise networks causes the
organization's actual security practice to diverge from the stated security
policy, potentially exposing the organization to additional unanticipated risks.
Direct
27
<PAGE> 29
observation of vulnerabilities and threats can allow an organization to define
and automatically enforce an integrated, enterprise-wide security policy that
can be managed centrally and implemented on a distributed basis. Because of the
shortage of personnel trained in network security issues, any security solution
must be easy to use by both management and the organization's existing IT
personnel. An effective network security solution also needs to work with
existing security technologies as well as be flexible enough to incorporate new
technologies.
THE ISS SOLUTION
ISS has developed Adaptive Security Management, a dynamic, process-driven
approach to enterprise-wide network protection. The ASM process relies on the
principles of monitoring, detection and response to the ever-changing
vulnerabilities in and threats to network protocols, operating systems and
applications that comprise every network system. The Company's monitoring,
detection and response products provide easy-to-use software solutions designed
to enable network managers to centrally define and manage an enterprise-wide
security policy for their existing network system infrastructure, including all
IP-enabled devices. The Company's SAFEsuite family of products provides the
ability to visualize, measure and analyze real-time security vulnerabilities and
control threats across the entire enterprise network infrastructure, keeping the
organization's IT personnel informed of changing network conditions and
automatically making adjustments as necessary. Through custom policies or by
using the Company's "best practice" templates, network managers can minimize
security risks without closing off the organization's network to the benefits of
open computing environments and the Internet. The Company's solution reaches
beyond the traditional approaches to network security in the following respects:
ADAPTIVE SECURITY MANAGEMENT
ASM is a proactive, risk management-based approach to network security
management that links security practice and security policy through a continuous
improvement process. ASM incorporates four critical processes: (i) continuously
monitoring network traffic and the configuration of devices on the network; (ii)
detecting security risks in network traffic and network devices; (iii)
responding to network security risks to minimize such risks; and (iv) reporting
response actions and updating security policies. The Company's products
incorporate the ASM approach to enable continuous improvement to the security of
the customer's existing systems by identifying and minimizing the security risks
on the network. The Company's SAFEsuite family of products continuously monitors
the network for security risks that violate the customer's security policy and
provides actions to eliminate or minimize the security weaknesses. SAFEsuite is
a critical enhancement to traditional passive security technologies such as
encryption, firewalls and authentication. The Company's products provide a
unique, active component to an organization's overall security infrastructure
that enables end-to-end network protection. The software automatically
identifies systems and activities that are not in compliance with a customer's
policies, and provides a critical feedback mechanism for adjusting the security
levels of networked systems based upon its findings. Without these capabilities,
an organization is limited in its ability to effectively measure and control
security across its enterprise network.
COMPREHENSIVE ENTERPRISE SECURITY SOLUTION
ISS combines ASM principles with its extensive knowledge of network
vulnerabilities and threats to provide scalable security solutions. The Company
sells its products individually as solutions to problems for a particular
network function or as a suite of products that provide a comprehensive network
security framework. The Company's products extend across a broad range of
platforms and work with the products of leading security and network management
vendors to provide a single point of management and control for an
enterprise-wide security policy across multiple hosts, operating systems and
applications. Products are designed to be easily installed, configured, managed
and updated by a system administrator through an intuitive graphical user
interface ("GUI") without interrupting or affecting network operation. The
Company's products generate easy-to-understand reports ranging from
executive-level trend analysis to detailed step-by-step instructions for
eliminating security risks that include automatic links to vendor Web sites for
software patches.
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THE "X-FORCE"
Because there are few IT professionals specifically trained in network
security issues, the Company created a senior research and development team
composed of security experts who are dedicated to understanding, documenting and
coding new vulnerability tests, real-time threats and attack signatures. The
team is known in the industry as the "X-Force". The X-Force conducts primary
research in the field of vulnerability and threat science which is the basis of
the core competency of the Company. The Company believes that the X-Force is one
of the largest and most sophisticated groups of IT security experts researching
vulnerability and threat science and therefore represents one of the Company's
competitive advantages. Organizations such as CERT (Computer Emergency Response
Team), the FBI and leading technology companies routinely consult the X-Force on
network security issues. Through the X-Force, ISS maintains a proprietary and
comprehensive knowledge base of computer exploits and attack methods, including
what the Company believes is the most extensive collection of Windows NT
vulnerabilities and threats. To respond to an ever-changing risk profile, the
X-Force continually updates this repository with the latest network
vulnerability information, which aids in the design of new products and product
enhancements.
STRATEGY
The Company's objective is to be the leading provider of ASM systems that
proactively protect the integrity and security of enterprise-wide information
systems from vulnerabilities, misuse, attacks and other policy violations. ISS
focuses on developing innovative and automated software solutions to provide
customers with a comprehensive framework for protecting their networks by
monitoring for vulnerabilities and real-time threats in order to enforce "best
practice" network and system security policies. Key elements of the Company's
strategy are to:
- CONTINUE LEADERSHIP POSITION IN SECURITY TECHNOLOGY. The Company intends
to maintain and enhance its technological leadership in the enterprise
security market by hiring additional network and Internet security
experts, broadening the Company's proprietary knowledge base and
continuing to invest in product development and product enhancements. By
solidifying its position as the leader in the emerging market for
monitoring, detection and response software, the Company believes that
customers and potential customers will view ISS as the firm of choice for
establishing and maintaining effective security practices and policies.
- EXPAND DOMESTIC SALES CHANNELS. To increase the distribution and
visibility of its products, ISS plans to execute its enterprise-wide
systems sales strategy by expanding its regional direct sales program and
increase market coverage by establishing additional indirect channels with
key ISPs, systems integrators, VARs, OEMs and other channel partners to
address enterprise-wide system opportunities. As the potential customer
base for network security products encompasses a wide variety of
industries, the Company believes that a multi-channel sales efforts will
build customer awareness of the need for the Company's products and enable
the Company to more rapidly penetrate these industry markets.
- PROMOTE PROFESSIONAL SERVICES CAPABILITIES. ISS intends to establish
long-term relationships with its customers by serving as a "trusted
advisor" in addressing network security issues. To fulfill this
responsibility to its customers, the Company will expand its professional
services capabilities to provide additional security system design,
planning, installation, testing and consulting services to assist
customers in the effective adaptation of their security policies as new
computing products and systems are deployed or new users or infrastructure
to existing systems are added. By providing professional services the
Company can heighten customer awareness about network security issues,
which creates opportunities for ISS to sell new products or product
enhancements to its existing customers.
- EXPAND INTERNATIONAL OPERATIONS. ISS plans to aggressively expand its
international operations to address the rapid global adoption of
distributed computing environments. Many foreign countries do not have
laws recognizing network intrusion or misuse as a crime or the resources
to enforce such laws if they do exist, and therefore, the Company believes
that organizations in such countries will have greater need for effective
security solutions. The Company currently maintains
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international offices in Belgium, Canada, England, France, Germany and
Japan. ISS plans to expand in those regions where businesses, governments
and other institutional users are using distributed networks and the
Internet for their mission-critical needs.
- CREATE ASM CATEGORY AWARENESS. The Company intends to increase and
broaden awareness of the need for ASM and the Company's enterprise
monitoring, detection and response systems by increasing its level of
public relations, educational events, seminars, advertising, direct
marketing and trade show participation. ISS believes that the risks and
dangers associated with the adoption of open computing systems have not
received the same level of general recognition or publicity as have the
benefits of using such systems. By increasing awareness of the
vulnerabilities and threats that are endemic to open computing
environments and the ability to manage such vulnerabilities and threats
through ASM, the Company can demonstrate to its customers how better
network protection can be achieved.
PRODUCT ARCHITECTURE
The ISS SAFEsuite family of products delivers the Company's ASM approach
through a flexible architecture designed to be integrated with existing security
and network system infrastructures. Passive point tools such as firewalls
provide specific security functionality for components within the network
infrastructure. SAFEsuite enhances the effectiveness of these tools by
monitoring them for threats and vulnerabilities and responding with actions that
align the customer's security practice with its security policy. SAFEsuite
complements network and security management frameworks by providing information
required for informed decisions to minimize security risks while maintaining the
desired level of network functionality. Thus, the Company's products provide a
risk management-based approach to security with scalable deployment of
best-of-breed products and integrated enterprise-wide implementations.
The following depicts the SAFEsuite product architecture:
[Graphic that shows how the Company's central products are structured
within a typical network system -- including a depiction of product
interfaces with the X-Force knowledge base, user-defined exploits,
firewall, router and user-defined adaptive program interfaces and the
ISS database.]
The Adaptive Security Application Programming Interface ("ASAPI") is the
focal point for automated interaction with static security technologies such as
encryption, firewalls and authentication servers. ASAPI is a two-way
communication protocol that allows SAFEsuite products to leverage information
and capabilities available across the network and to proactively adapt
configurations of security subsystems on the network. For example, SAFEsuite
products identify valid Java and ActiveX applets in Web traffic by using the
authentication information available in digital certificates such as those from
VeriSign. When a security risk is identified, ASAPI is used to send a message
directly to the appropriate passive protection tool to eliminate the risk (e.g.,
when an attacker is identified, the firewall is automatically reconfigured to
block the attacker's IP address). ASAPI leverages existing infrastructure
control standards such as Check Point Software Technologies' OPSEC (Open
Platform for Secure Enterprise Connectivity), allowing deployment of the
Company's products without requiring upgrades or changes to the customer's
existing hardware or software.
The SAFEsuite policy management interface lets the customer choose from
"best practice" templates or provides the ability to define a specific policy
that establishes the level of risk appropriate for the network. The individual
products automatically verify compliance with the policy in terms of actual
system configuration and activity present on the network. Graphical reports
express the deviations from the established policy, including the measures
required to reduce the risk. The policy can include automatic intervention by a
SAFEsuite product through ASAPI.
This product architecture allows all the SAFEsuite technologies to connect
directly into common standards, providing comprehensive security reports for the
entire enterprise. To ensure communication confidentiality between individual
SAFEsuite components and to prevent misuse, SAFEsuite uses RSA encryption
algorithms, which have become de facto encryption standards. The SAFEsuite
Security Repository, a database containing information about the devices and
security risks on a customer's
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network, utilizes an Open Database Connectivity ("ODBC") interface and allows
customers to select their preferred database such as Oracle, Microsoft SQL
Server, Sybase, Informix or any ODBC-compliant database for data storage. All
ISS products use a common taxonomy for identifying specific security issues. The
various SAFEsuite products consolidate security data, enabling the user to
quickly determine its risk posture and take appropriate actions. In addition,
SAFEsuite products provide automated decision support by assessing priorities
and providing a graphical representation of important security risk data sets.
This allows key decision-makers to prioritize their program strategies for
effective deployment of resources to minimize security risks.
The SAFEsuite architecture also delivers scalability in deployment options,
usage models and ongoing operations. Each SAFEsuite product can be deployed as a
stand-alone, best-of-breed solution to meet the needs of the local administrator
or departmental user. Through support for remote, multi-level management
consoles and the SAFEsuite Security Repository, database enterprise level users
can analyze security risk conditions for the entire network. The SAFEsuite
Security Repository allows the customer to address both vulnerabilities and
threats, thereby minimizing network security risk and associated costs.
SAFEsuite's frequent updates integrate the latest identified security
vulnerabilities and threats into the operations of an existing ISS product
installation.
PRODUCTS
The following table lists the SAFEsuite products currently offered by the
Company, and includes a brief description of each product's functionality and
current list pricing:
<TABLE>
<CAPTION>
INTRODUCTION
DESCRIPTION SCOPE U.S. LIST PRICE DATE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NETWORK SECURITY VULNERABILITY DETECTION, ANALYSIS AND REPORTING
- ------------------------------------------------------------------------------------------------------------
Internet Scanner Comprehensive security 50 devices $ 3,495 October 1992
assessment for all 100 devices $ 5,395
devices on an enterprise 500 devices $14,650
network
- ------------------------------------------------------------------------------------------------------------
Intranet Scanner Security assessment for 10 devices $ 795 August 1996
internal devices on an 20 devices $ 1,495
enterprise network 50 devices $ 2,995
- ------------------------------------------------------------------------------------------------------------
Firewall Scanner Security assessment for 1 firewall $ 995 August 1996
firewalls and gateways 5 firewalls $ 4,495
10 firewalls $ 7,995
- ------------------------------------------------------------------------------------------------------------
Web Security Scanner....... Security assessment for 1 Web server $ 495 August 1996
Web servers 5 Web servers $ 1,995
10 Web servers $ 3,495
- ------------------------------------------------------------------------------------------------------------
INTERNAL SYSTEM SECURITY VULNERABILITY DETECTION, ANALYSIS AND REPORTING
- ------------------------------------------------------------------------------------------------------------
System Security Internal security 5 computers $ 1,995 January 1997
Scanner -- S3 assessment for 10 computers $ 3,495
operating systems 20 computers $ 5,995
- ------------------------------------------------------------------------------------------------------------
NETWORK SECURITY THREAT AND MISUSE DETECTION, ANALYSIS AND RESPONSE
- ------------------------------------------------------------------------------------------------------------
RealSecure Real time attack 1 engine $ 4,995 December 1996
recognition, misuse 5 engines $19,900
detection and response 10 engines $34,900
for networks
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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INTERNET SCANNER
Internet Scanner provides automated security vulnerability detection and
analysis for devices on a network and supports the security risk management
process from policy development through implementation. In addition, Internet
Scanner performs scheduled or event-driven probes of network communication
services, operating systems, routers, e-mail and Web servers, firewalls and
applications to identify weaknesses that could be exploited by intruders to gain
access to the network. After selecting from a list of pre-defined "best
practice" templates or customizing a template appropriate for the organization,
Internet Scanner quickly produces a technical security policy document with
detailed implementation instructions. Internet Scanner can then assess the
entire network for compliance with the security policy, identifying the specific
instances where security practice does not match the prescribed policy. Internet
Scanner identifies and prioritizes security risks and generates a wide range of
reports ranging from executive-level trend analysis to detailed step-by-step
instructions for eliminating security risks including automatic links to vendor
Web sites for software patches.
Internet Scanner is also packaged as separate modules -- Intranet Scanner,
Web Security Scanner and Firewall Scanner -- each targeted for specific market
segments. The Internet Scanner embodies all three network-scanning modules.
INTRANET SCANNER. Intranet Scanner assesses the vulnerability of a network
to attack from intruders who have penetrated a firewall by systematically
probing each network device to identify security vulnerabilities. Network
platforms and devices, including Windows NT and Windows 95, Unix hosts, routers,
e-mail servers, Web servers and firewalls are among those automatically checked
by Intranet Scanner. Many system operators typically focus security measures on
only those devices within the system that contain the most sensitive
information. Other devices often are left vulnerable, thus enabling unauthorized
users to compromise a less sensitive device (like a Unix printer server) to gain
access that can springboard them into more sensitive systems. Intranet Scanner
scans for such weak-link vulnerabilities in the chain of devices in the network,
including vulnerabilities arising from the use of default and easily-guessable
passwords for devices within the system, misconfigured file system servers and
unprotected Windows NT registry settings. Intranet Scanner not only determines
if an intruder could gain access, but also ascertains if a device is susceptible
to denial of service attacks by vandals who may seek to deny access to or use of
systems by authorized users.
WEB SECURITY SCANNER. Web Security Scanner tests the configuration of a
Web server, evaluates the security of the underlying operating system and
determines whether the Web server application has been updated with the latest
security patches. This module searches the Web server's common gateway
interface, active server page scripts and HTML (hypertext mark-up language)
directories to detect whether known vulnerabilities exist within the customer's
Web server system. For private HTML pages that are password protected, Web
Security Scanner assesses vulnerability to a "brute-force attack" (i.e., a
flooding of log-on attempts in an effort to overwhelm password screening and
thereby gain unauthorized access) through checks of easily-guessable or default
passwords. Finally, Web Security Scanner identifies any Java and ActiveX applets
on the Web server that may conflict with the customer's security policy.
FIREWALL SCANNER. Firewall Scanner identifies vulnerabilities by
monitoring the configuration of firewalls through a series of security checks.
The improper configuration of a firewall can seriously compromise the
effectiveness of the firewall as a security measure. Firewall Scanner's checks
include attempting to bypass the firewall by trying to connect through packet
filter-based firewalls, stateful inspection-based firewalls and application
proxy servers. Blocked or permitted connections validate the firewall's
configured filter rules. A firewall permitting an outside connection through to
an inside vulnerable server can provide an intruder with the opportunity to
compromise the entire network. The Firewall Scanner determines whether a SNMP
(simple network management protocol) is enabled on the firewall allowing
sensitive network information to be obtained by intruders and determines whether
a vandal can bring down a firewall through numerous denial of service attacks.
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In addition, the Company offers Advanced Packet Exchange ("APX") as a
recent enhancement for Firewall Scanner. APX provides a GUI that facilitates the
creation of low-level custom network packets. It then attempts to transmit them
through the firewalls or routers conducting packet validation. This determines
whether these packets were allowed or blocked at the gateway. By doing so, this
technology enables more precise testing and assessment of the security rules
associated with network access controls.
SYSTEM SECURITY SCANNER
System Security Scanner provides a host-based security assessment analyzing
internal security weaknesses. While the Internet Scanner determines
vulnerabilities by scanning devices at the network level, S3 detects
vulnerabilities internally on the system level, by having an S3 agent resident
on the devices. These S3 agents allow a continuous security policy to be managed
and controlled across an enterprise from a central point. S3 compares an
organization's stated security policy with the actual configuration of the host
computer for potential security risks, including easily-guessed passwords, user
privileges, file system access rights, service configurations, data integrity,
and the existence of Trojan backdoors and suspicious activity that indicate an
intrusion. S3 verifies that the components of the operating system have been
updated with the latest patches from the operating system vendor. Each security
risk is prioritized by S3, which also generates scripts that implement the
appropriate corrective action.
REALSECURE
RealSecure is an automated, real-time intrusion detection, misuse and
response system for computer networks. The RealSecure Attack Recognition Engine,
which unobtrusively analyzes packets of information as they travel across the
network, recognizes hostile activity on a network by interpreting network
traffic patterns that indicate attacks. RealSecure's Suspicious Reassembly
algorithm analyzes packets for unusual formations that can indicate an attack
while simultaneously protecting RealSecure itself from these attacks. When an
attack is recognized, the administrator is alerted via e-mail and an alarm is
displayed on the central management console. In addition, the attack can be
terminated automatically, logged to a database, or recorded for later forensic
analysis. With RealSecure's distributed architecture, customers can install
Attack Recognition Engines throughout their enterprise network to detect and
stop internal misuse as well as attacks from outside the network perimeter.
Increasing network speeds and numbers of attacks geometrically increase the
potential workload for attack recognition solutions. RealSecure utilizes the
Company's Digital FingerPrinting to recognize a large number of attack-patterns
on high-speed networks. Additionally, the Company's Adaptive Filtering Algorithm
tunes the packet filter rules in response to network load, allowing the engine
to effectively function during bursts in network traffic.
PRODUCT PRICING
ISS uses a range of fee structures to license its products, depending on
the type of product and the intended use. The vulnerability detection
products -- the Internet Scanner family of products and System Security
Scanner -- are licensed based on the number of devices being scanned. The
pricing scheme is scalable, providing low entry points for departmental users
without capping the Company's revenue for large networks. Pricing for the threat
detection product, RealSecure, is based on the number of engines deployed on the
network. Thus, licensing fees for the Company's products are ultimately
determined by the size of the customer's network, as the size will dictate the
number of devices to be scanned or the number of engines to be deployed for a
given performance level. In addition to license fees, customers virtually always
purchase maintenance agreements in conjunction with their purchase of a software
license for annual maintenance fees equal to 20% of the product's list price;
maintenance agreements include annually renewable telephone support, product
updates, access to the Company's X-Force Security Alerts and error corrections.
The Company's continuing research into new security risks and resultant product
updates provides significant ongoing value, and as a result, a substantial
majority of the
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Company's customers purchase maintenance agreements. Customers who use the
Company's products to provide IT consulting services have license agreements
that are based on a revenue sharing model. ISS has historically sold fully-paid
perpetual licenses with a renewable annual maintenance fee, but it is currently
in the process of increasing the licensing of its products on a subscription
basis (which includes maintenance) for one or two year periods.
SERVICES
ISS offers specialized consulting and training services that are designed
to complement the general knowledge and experience derived by IT professionals
with specific information and assistance to promote customer success in the use
of the Company's products.
The Company's Professional Services Group assists customers in the
successful implementation of the Company's products. The Professional Services
Group's senior operational and technical consultants work with the Company's
customers to identify potential security risks within the customer's operations,
business processes and constraints in order to develop an implementation
strategy that will configure products in a manner that balances the customer's
need for system security with ease-of-use and flexibility requirements. In this
manner, ISS consultants assist customers in mapping the deployment of the
Company's products to the customer's network and security policy and the metrics
for assessing the effectiveness of and enforcing the security policy. The
Company charges its customers for professional services on a time and materials
basis.
In addition to performing consulting services for customers, ISS provides
focused education and training in the use of its products and security issues
through the ISS University program. Students who complete the curriculum and
pass both a hands-on product test and a written test become ISS Certified
Engineers.
PRODUCT DEVELOPMENT
The Company has developed its SAFEsuite products to operate in
heterogeneous computing environments. Products are compatible with other
vendors' products across a broad range of platforms, including Windows NT,
Windows 95, Sun Solaris, SunOS, SGI IRIX, Linux, HP-UX and IBM AIX. The Company
incorporates a modular design to permit plug-and-play capabilities for its
products, although customers often use professional services provided by the
Company or its strategic partners to install and configure products for use in
larger or complex network systems.
The Company employs a two-pronged product development strategy to achieve
its goal of providing the most comprehensive security coverage within the
monitoring, detection and response market. First, the Company will continue to
develop best-of-breed security products to address particular network
configurations. Such new products, and the Company's existing products like
Internet Scanner, System Security Scanner and RealSecure, are updated
approximately every four to six months to add new features, improve
functionality and incorporate responses to vulnerabilities and threats that have
been added to the Company's vulnerability and threat database. These updates are
usually provided as part of separate maintenance agreements sold with the
product license.
Second, to complement its existing products and provide more comprehensive
security coverage to networks, the Company is expanding its existing SAFEsuite
products by developing additional enterprise-level products that incorporate ASM
principles. These products will add functionality to the Company's existing
product line by allowing customers to protect their network by continuously
measuring and analyzing the status of their network's security and monitoring
and controlling the real-time security risks across the enterprise network.
These new products will be interoperable with existing Company products,
allowing modular implementation.
Expenses for product development were $97,000, $1.2 million and $3.4
million in 1995, 1996 and 1997, respectively. All product development activities
are conducted at the Company's principal offices in Atlanta, where, as of
December 31, 1997, 48 personnel were employed in product development teams.
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In addition, Company personnel are members of the Computer Security Institute,
Forum for Incident Response and Security Technicians (FIRST), Georgia Tech
Industrial Partners Association and the International Computer Security
Association (ICSA), enabling the Company to actively participate in the
development of industry standards in the emerging market for network and
Internet security systems and products.
CUSTOMERS
As of December 31, 1997, the Company had licensed versions of its SAFEsuite
family of products to over 1,500 customers. The Company's target customers
include both public and private sector organizations, that utilize IP-enabled
information systems to facilitate mission-critical processes in their
operations. The Company's customers represent a broad spectrum of organizations
within diverse sectors, including financial services, technology,
telecommunications, government and services.
The following is a list of certain of the Company's customers that have
purchased licenses and services from the Company with an aggregate price of at
least $15,000 and which the Company believes are typical of its customer base.
FINANCIAL SERVICES
Charles Schwab
First Union
KeyCorp
Merrill Lynch
PNC Bank
TECHNOLOGY
Hewlett-Packard
IBM
Intel
Lucent Technologies
Microsoft
NCR
Siemens
Xerox
OTHER
Lockheed Martin
Merck
TELECOMMUNICATIONS
America Online
Bell Atlantic
BellSouth
GTE Internetworking
NETCOM On-Line Communications
Nippon Telephone & Telegraph
GOVERNMENT
NASA
Salt River Project
U.S. Department of the Air Force
U.S. Department of the Army
U.S. Department of Defense
U.S. State Department
SERVICES
EDS
KPMG Peat Marwick
Price Waterhouse
SAIC
SITA
SALES AND MARKETING
SALES ORGANIZATION
The Company's sales organization is divided regionally among the Americas,
Europe and the Asia/Pacific regions. In the Americas region, ISS markets its
software primarily through its direct sales organizations augmented by its
indirect channels, including security consultants, VARs and systems consulting
and integration firms. The direct sales organization for the Americas consists
of regionally based sales representatives and sales engineers and a tele-sales
organization located in Atlanta. At December 31, 1997, the Company's sales
offices were located in the Atlanta, Austin, Boston, Chicago, Cincinnati,
Dallas, Los Angeles, New York, Palo Alto, Philadelphia, San Francisco, Toronto
and Washington, D.C. metropolitan areas. A dedicated group of professionals in
the Atlanta headquarters covers Latin America. As of December 31, 1997, the
Company employed 35 people in the Americas region direct
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sales organization. The regionally-based direct sales representatives focus on
opportunities where the Company believes it can realize more than $200,000 in
revenues.
In the Europe and Asia/Pacific regions, substantially all of the Company's
sales occur through authorized resellers. Internationally, the Company has
established regional sales offices in Brussels, London, Paris, Stuttgart and
Tokyo. Personnel in these offices are responsible for market development,
including managing the Company's relationships with its resellers, assisting
them in winning and supporting key customer accounts and acting as a liaison
between the end user and the Company's marketing and product development
organizations. As of December 31, 1997, 15 employees were located in the
Company's Europe and Asia/Pacific regional offices. The Company expects to
continue to expand its field organization into additional countries in these
regions.
SECURITY PARTNERS PROGRAM
The Company has established its Security Partners Program to train and
organize security consulting practices, ISPs, systems integrators and VARs to
match the Company's products with their own complementary products and services.
By reselling SAFEsuite products, Security Partners provide additional value for
specific market and industry segments, while maintaining the Company's ongoing
commitment to quality software and guaranteed customer satisfaction. To support
the varying needs of different partners, ISS has established four different
levels of partnership opportunities: Consulting Partners, Premier Partners,
Authorized Partners and Registered Partners. Consulting Partners consist of
general systems integrators and others who use the Company's products to provide
information security services for their clients. Consulting Partners may
purchase travelling licenses that can be used for one concurrent user for one
year. Premier Partners combine sales and integration of encryption, firewall and
authentication technologies with the Company's products. Authorized and
Registered Partners must purchase products from Premier Partners. In addition,
all Security Partners are required to employ a designated number of ISS
Certified Engineers. ISS provides its partners with technical support, sales and
marketing tools, quarterly rebates and other sales incentives and cooperative
marketing funds at varying levels depending on the level of partnership.
MARKETING PROGRAMS
The Company conducts a number of marketing programs to support the sale and
distribution of its products. These programs are designed to inform existing and
potential OEMs, resellers and end-user customers about the capabilities and
benefits of the Company's products. Marketing activities include: press
relations and education; publication of technical and educational articles in
industry journals and in the Company's on-line magazine, ISS Alert;
participation in industry tradeshows; product/technology conferences and
seminars; competitive analysis; sales training; advertising; development and
distribution of Company literature; and maintenance of the Company's Web site. A
key element of the Company's marketing strategy is to establish the Company's
products and its ASM model as the leading approach for enterprise-wide security
management. The Company has implemented a multi-faceted program to leverage the
use of the SAFEsuite product family and increase its acceptance, through
relationships with various channel partners:
STRATEGIC RESELLERS. Although the Company has numerous resellers,
certain of these relationships have generated significant leverage for the
Company in targeted markets. The Company's strategic resellers, which
include EDS, SAIC, Siemens, Softbank and Tivoli Systems, provide ISS broad
brand awareness through enhanced marketing activity, access to large sales
forces, competitive control points and access to larger strategic customer
opportunities.
CONSULTANTS. The use of the Company's products by security
consultants not only generates revenue for the Company from the license to
the consultant, but also provides the Company with leads to potential end
users with a concern for network security. Consultants who have generated
substantial leads for the Company's sales organization include Andersen
Consulting, Deloitte Touche Tohmatsu International, IBM, KPMG Peat Marwick
and Price Waterhouse.
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ISPS. The Company licenses its products to certain ISPs to be used as
part of their value-added services for their customers. With the Company's
products, ISPs can offer their users perimeter vulnerability scanning and
assessment, intrusion detection for Web services and applications that
typically reside outside the firewalled perimeter. ISS licenses its
products to BellSouth, GTE, PSINet and other ISPs for these purposes and
receives a percentage of the value-added revenue stream.
OEMS. A number of vendors of security products, including NCR and ODS
Networks, have signed OEM agreements with the Company. These agreements
enable OEMs to incorporate the Company's products into their own security
offerings to provide a complete security package. The Company receives
royalties from OEM vendors and increased acceptance of the Company's
products under these arrangements, which in turn promotes sales of the
Company's other products to the OEM's customers.
CUSTOMER SERVICE AND SUPPORT
The Company provides ongoing product support services under its license
agreements. Maintenance contracts are typically sold to customers for a one-year
term at the time of the initial product license and may be renewed for
additional periods. Under its maintenance agreements with its customers, the
Company provides, without additional charge, telephone support, documentation
and software updates and error corrections. Customers that do not renew their
maintenance agreements but wish to obtain product updates and new version
releases are generally required to purchase such items from the Company at
market prices. In general, major new product releases come out annually, minor
updates come out every four to six months and new checks come out every two to
four weeks. All product updates are available to customers with current
maintenance agreements for downloading from the Company's Web site.
The Company believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation which, in
turn, is essential to customer satisfaction and continued license sales and
revenue growth. Accordingly, the Company is committed to continued recruiting
and maintenance of a high-quality technical support team. The Company provides
telephone support to customers who purchase maintenance agreements along with
their product license. A team of dedicated engineers trained to answer questions
on the installation and usage of the SAFEsuite products provides telephone
support from 8:00 a.m. to 6:00 p.m., Eastern time, Monday through Friday, from
the Company's corporate office in Atlanta. The Company provides telephone
support 24 hours a day, seven days a week through a call-back procedure to
certain customers who pay an additional fee for the service. In the United
States and internationally, the Company's VARs provide telephone support to
their customers with technical assistance from the Company.
Because security-knowledgeable IT personnel are in extremely short supply
throughout the industry, ISS provides focused education and training in the use
of its products and security issues through the ISS University program.
Education on security effectiveness and minimizing security risks in IT
infrastructure are natural extensions of the Company's position as a provider of
network security monitoring, detection and response systems. ISS University
offers certification on ISS products through the ICE (ISS Certified Engineer)
program. ISS University also offers a CNSE (Certified Network Security Engineer)
degree for network security management. The Company's reputation as a security
expert provides the basis for the value of such security degrees. Leveraging the
efforts of current security training organizations accelerates the acceptance of
the Company's certification program by the industry. Participation hours, or
credits, received from other complementary security training programs, such as
those offered by Computer Security Institute, MIS Training and similar
organizations, can be applied towards the hours required to be completed in the
ISS University program.
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<PAGE> 39
COMPETITION
The market for monitoring, detection and response products and services is
intensely competitive and the Company expects competition to increase further in
the future. The Company believes that the principal competitive factors
affecting the market for network security products include security
effectiveness, manageability, technical features, performance, ease of use,
price, scope of product offerings, distribution relationships and customer
service and support. Although the Company believes that its SAFEsuite family of
products generally competes favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources.
The Company's principal competitors generally fall within one of three
categories: internal IT departments or consulting firms that assist such
departments, relatively smaller software companies that offer applications with
limited scope and larger software companies that are either in the process of
entering the Company's market or have the potential to develop products to
compete with the Company's products. Due to a lack of awareness of the Company's
products and services or a lack of appreciation of the complexity involved in
the development of automated systems to establish, and more importantly,
maintain comprehensive and effective levels of security within a distributed
computing environment, potential customers often rely on their IT departments to
internally formulate security systems or to retain consultants to undertake such
a project. However, because experts in security issues are in extremely short
supply, such in-house solutions typically fail to provide a comprehensive and
sophisticated approach to security, are not designed to adapt to changing
security policies and are extremely expensive to develop. The Company expects
that as IT consulting firms learn of the Company's products and their relative
cost, they will be less inclined to undertake projects that require them to
independently develop systems with functionalities similar to the Company's
products.
In addition, a number of companies currently market or have under
development software applications to provide network and Internet security. The
Company believes that, to date, none of these relatively smaller companies offer
products that are as robust in features or as comprehensive in scope as the
SAFEsuite family of products. Although it is likely that the product development
efforts of these companies will eventually enable them to offer a line of
products to compete with the Company's current product line, the Company intends
to continue to dedicate significant resources for product development and
recruiting in order to expand the Company's product capabilities ahead of these
competitors. Notwithstanding, the Company expects additional competition from
these established competitors and from other emerging companies. Furthermore,
any future mergers or consolidations among these competitors would make them
more formidable competitors to the Company. There can be no assurance that the
Company's current and potential competitors will not develop security auditing
and monitoring products that may be more effective than the Company's current or
future products or that the Company's technologies and products will not be
rendered obsolete by such developments.
Finally, there are a number of companies that currently market and sell
various software products, such as encryption, firewall, operating system
security and virus detection software, that have been broadly adopted by the
Company's customers and potential customers to provide various levels of
security within their computing environments. Some of these companies have
released products which provide similar functionality as certain of the
Company's products. In addition, vendors of operating system software or
networking hardware may in the future enhance their products to include
functionality that is currently provided by the Company's products. The
widespread inclusion of the functionality of the Company's software as standard
features of operating system software or networking hardware could render the
Company's products obsolete and unmarketable, particularly if the quality of
such functionality were comparable to that of the Company's products.
Furthermore, even if the security auditing and monitoring functionality provided
as standard features by operating systems software or networking hardware is
more limited than that of the Company's software, there can be no assurance that
a significant number of customers would not elect to accept more limited
functionality in lieu of purchasing additional software. Many of these larger
companies have longer operating histories, greater name
38
<PAGE> 40
recognition, access to larger customer bases and significantly greater
financial, technical and marketing resources than the Company. As a result, they
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the promotion and sale
of their products than the Company. The Company believes that the entry of these
larger companies into its market will require them to undertake operations that
are currently not within their core areas of expertise, and thus expose them to
significant uncertainties in the product development process or in providing a
range of products to comprehensively address the security risks and
vulnerabilities which the SAFEsuite product family addresses. However, if these
companies were to introduce products that effectively competed with the
Company's products, they could be in a position to substantially lower the price
of their security auditing and monitoring products or to bundle such products
with their other products, which would make it more difficult for the Company to
compete with them.
For the foregoing reasons, there can be no assurance that the Company will
be able to compete successfully against its current and future competitors.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would materially and adversely affect the
Company's business, operating results and financial condition. See "Risk
Factors -- Competition".
PROPRIETARY RIGHTS AND TRADEMARK ISSUES
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a technology
leadership position. The Company seeks to protect its software, documentation
and other written materials under the trade secret and copyright laws, which
afford only limited protection. The Company also has submitted one United States
patent application. There can be no assurance that a patent will issue from this
application or, if issued, that such patent would provide meaningful competitive
advantages to the Company. The Company generally licenses SAFEsuite products to
end users in object code (machine-readable) format. Certain customers have
required the Company to maintain a source-code escrow account with a third-party
software escrow agent, and a failure by the Company to perform its obligations
under any of the related license and maintenance agreements, or the insolvency
of the Company, could conceivably cause the release of the Company's source code
to such customers. The standard form agreement allows the end user to use the
SAFEsuite products solely on the end user's computer equipment for the end
user's internal purposes, and the end user is generally prohibited from
sublicensing or transferring the products.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights to as great an extent as do the laws of the United States. There can be
no assurance that the Company's competitors will not independently develop
similar technologies.
Although the Company is not aware that any of its products infringes the
proprietary rights of third parties, there can be no assurance that third
parties will not claim infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
39
<PAGE> 41
The name "Internet Security Systems" is not currently subject to trademark
registration in the United States, and may not be a name for which a trademark
is registrable due to its general use in a variety of security-related
applications. Although the Company has in the past asserted and intends to
continue to assert its rights with respect to the name "Internet Security
Systems" and has taken and will take action against any use of such name in a
manner that may create confusion with the Company's products in relevant
markets, there can be no assurance that the Company will be successful in such
efforts, which could have a material adverse effect upon the Company's business,
operating results and financial condition.
EMPLOYEES
As of December 31, 1997, the Company had 141 employees, of whom, 48 were
engaged in product research and development, 50 were engaged in sales, six were
engaged in customer service and support, six were engaged in professional
services, 19 were engaged in marketing and business development and 12 were
engaged in administrative functions. The Company believes that its relations
with its employees are good.
FACILITIES
The Company presently occupies approximately 20,000 square feet of office
space in Atlanta for its headquarters and research and development facilities
pursuant to three leases expiring on various dates through 2001, with renewal
options. The Company also leases office space for its sales and marketing
personnel in Austin, Boston, Chicago, Cincinnati, Dallas, Nashua, New York, Palo
Alto, Philadelphia, San Mateo and Washington, D.C., as well as Brussels, London,
Paris, Stuttgart, Tokyo and Toronto. The Company believes that its existing
facilities are adequate for its current needs and that additional space will be
available as needed.
40
<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Thomas E. Noonan.................. 37 President, Chief Executive Officer and Chairman of the
Board of Directors
Christopher W. Klaus.............. 24 Chief Technical Officer, Secretary and Director
Richard Macchia................... 46 Vice President and Chief Financial Officer
H. Keith Cooley................... 44 Vice President (Engineering)
M. Thomas McNeight................ 53 Vice President (Americas Sales)
Alex Bogaerts..................... 48 Vice President (Europe)
Lin Ja Hong....................... 39 Vice President (Asia/Pacific)
Richard S. Bodman................. 59 Director
Robert E. Davoli.................. 49 Director
Kevin J. O'Connor................. 36 Director
David N. Strohm................... 49 Director
</TABLE>
Mr. Noonan has served as the President and as a Director of ISS since
August 1995, and as its Chief Executive Officer and Chairman of the Board of
Directors since November 1996. Prior to joining ISS, Mr. Noonan served as Vice
President, Sales and Business Development with TSI International, an electronic
commerce company then owned by Warburg Pincus and Dun & Bradstreet, from October
1994 until August 1995. From November 1989 until October 1994, Mr. Noonan held
high-level sales and marketing positions at Dun & Bradstreet Software, a
developer of enterprise business software. Prior to 1989, Mr. Noonan co-founded
Actuation Electronics (a motion control company for precision applications) and
founded Leapfrog Technologies (an object-oriented software development tools
company for networked applications). Mr. Noonan holds a B.S. in mechanical
engineering from the Georgia Institute of Technology and a C.S.S. in business
administration and management from Harvard University.
Mr. Klaus founded ISS in April 1994 and served as its President until
August 1995 and as its Chief Executive Officer until November 1996. Mr. Klaus
continues to serve the Company as its Chief Technical Officer and a Director.
Prior to founding ISS, Mr. Klaus developed a shareware version of the Internet
Scanner while attending the Georgia Institute of Technology.
Mr. Macchia joined ISS as its Vice President and Chief Financial Officer in
December 1997. From December 1989 through December 1997, Mr. Macchia was
employed by First Financial Management Corporation ("FFMC") as its Executive
Vice President (Finance), and by First Data Corporation as its Senior Vice
President (Finance) following its merger with FFMC. Mr. Macchia received a
B.B.A. in accounting from the University of Notre Dame.
Mr. Cooley has served as Vice President (Engineering) of ISS since January
1996. Mr. Cooley has over twenty years of executive-level experience in software
development and customer support, most recently as a founding partner for Value
Sourcing Group, an Atlanta-based management consultancy specializing in
information technology, from 1995 to 1996. Prior to that, Mr. Cooley was
employed by Dun & Bradstreet Software for over 16 years where he held various
management and executive-level positions in marketing, development and support,
and ended his tenure as Chief Information Officer. Mr. Cooley holds a B.S. in
industrial engineering from the Georgia Institute of Technology.
Mr. McNeight has served as Vice President (Americas Sales) of ISS since
August 1996. Prior to joining ISS, Mr. McNeight was employed for more than
twenty years in various sales, sales management
41
<PAGE> 43
and executive management positions with technology and service companies, having
most recently been a principle in The Complex Sale, a strategic sales consulting
and training firm, from December 1995 to August 1996. In 1995, Mr. McNeight was
Senior Vice President, Americas Operations, for TSW International, Inc., a
supplier of plant performance and maintenance management software. Additionally,
Mr. McNeight was Chief Executive Officer of Aurum Software Inc. from 1993 to
1994 and, prior to that, spent thirteen years at Dun & Bradstreet, ending his
tenure as Executive Vice President for the Americas. Mr. McNeight has a B.S. in
chemistry from Oklahoma State University and an M.S. in management information
sciences from Texas Christian University.
Mr. Bogaerts joined ISS as its Vice President (Europe) in February 1996.
Before joining ISS, Mr. Bogaerts was an independent technology consultant from
September 1995 to February 1996, and prior to that held sales, marketing and
strategic marketing, and general management positions with Dun & Bradstreet
Software from 1992 to September 1995, and with Ethica N.V., an enterprise IT
management and consulting firm, from 1989 to 1992. Mr. Bogaerts received a
degree in applied economics and management sciences from the University of
Leuven, Belgium, and an M.B.A. through a joint program of the University of
Leuven, the University of Chicago and Cornell University Business Schools.
Mr. Lin has served ISS as Vice President (Asia/Pacific) since January 1997
and manages the Company's Asia/Pacific operations from the Company's office in
Tokyo. Mr. Lin has over twenty years of sales and marketing experience in the
Asia/Pacific software market. From 1984 to December 1996, he held a number of
sales, marketing and development positions with Dun & Bradstreet Technology Asia
(formerly known as Ashisuto KK), most recently as its Vice President and General
Manager of Sales and Operations. Mr. Lin holds a B.A. in business administration
from Aoyama Gakuin University in Tokyo.
Mr. Bodman joined the Company's Board of Directors in July 1997. Since May
1996, Mr. Bodman has served as the Managing General Partner of AT&T Ventures,
LLC, which manages numerous venture capital investments. Before joining AT&T
Ventures, LLC, Mr. Bodman served AT&T Corporation in various senior management
positions. Mr. Bodman serves on the board of directors of several public and
private companies, including Tyco International, Inc., LIN Television, Inc. and
Reed Elsevier plc. Mr. Bodman holds a B.S. in engineering from Princeton
University and an M.S. in industrial management from the Massachusetts Institute
of Technology.
Mr. Davoli has been a Director of the Company since February 1996. Mr.
Davoli has been a General Partner of or an advisor to Sigma Partners, a venture
capital firm, since January 1995. Mr. Davoli was President and Chief Executive
Officer of Epoch Systems, Inc., a client/server storage management provider,
from February 1993 to September 1994. From May 1986 through June 1992, Mr.
Davoli was the President and Chief Executive Officer of SQL Solutions, a
relational database management systems consulting and tools company that he
founded and sold to Sybase, Inc. in January 1990. Mr. Davoli serves as a
director of several privately held companies. Mr. Davoli received a B.A. in
history from Ricker College.
Mr. O'Connor has served as a Director of the Company since October 1995.
Mr. O'Connor has been the Chief Executive Officer and Chairman of DoubleClick,
Inc. since January 1996. From September 1994 to December 1995, Mr. O'Connor
served as Director of Research for Digital Communications Associates, a data
communications company (now Attachmate Corporation), and from April 1992 to
September 1994, as its Chief Technical Officer and Vice President, Research.
From its inception in May 1983 until its sale in April 1992, Mr. O'Connor served
as Vice President, Research of Intercomputer Communications Corp., a software
development company. Mr. O'Connor received his B.S. in electrical engineering
from the University of Michigan.
Mr. Strohm has served as a Director of the Company since January 1996.
Since 1980, Mr. Strohm has been an employee of Greylock Management Corporation,
a venture capital group ("Greylock"), and he is a general partner of several
venture capital funds affiliated with Greylock. Mr. Strohm currently serves as a
director of Banyan Systems, Inc., an enterprise networking software company, and
Legato Systems, Inc., a data storage management software company. Mr. Strohm
received his B.A. from Dartmouth College and his M.B.A. from Harvard Business
School.
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<PAGE> 44
BOARD OF DIRECTORS
The Charter and Bylaws provide that the size of the Board of Directors of
the Company (the "Board") shall be determined by resolution of the Board. The
Board is currently composed of six members. Each director holds office until the
next annual meeting of stockholders or until his or her successor is duly
elected and qualified. The Company's Charter and Bylaws provide that, beginning
with the first annual meeting of stockholders following this offering, the Board
will be divided into three classes serving for staggered, three-year terms.
The Board has established a Compensation Committee and an Audit Committee.
The members of the Compensation Committee are Robert E. Davoli, Kevin J.
O'Connor and David N. Strohm, and the members of the Audit Committee are Richard
S. Bodman, Robert E. Davoli and Thomas E. Noonan.
The Audit Committee of the Board was established in January 1998 and
reviews, acts on and reports to the Board with respect to various auditing and
accounting matters, including the selection of the Company's auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of the
Company's independent auditors and the accounting practices of the Company.
The Compensation Committee of the Board was established in February 1996
and re-authorized in January 1998. The Compensation Committee determines the
salaries and incentive compensation of the officers of the Company and provides
recommendations for the salaries and incentive compensation of the other
employees of the Company. The Compensation Committee also administers the
Company's various incentive compensation, stock and benefit plans.
Except for grants of stock options, directors of the Company generally do
not receive compensation for services rendered as a director. The Company also
does not pay compensation for committee participation or special assignments of
the Board. Following this Offering, each director will be reimbursed for all
out-of-pocket expenses incurred in attending meetings of the Board and
committees thereof. Non-employee Board members will receive option grants at
periodic intervals under the Automatic Option Grant Program of the 1995 Plan and
will also be eligible to receive discretionary option grants under the
Discretionary Option Grant Program of such plan. See "-- Restated 1995 Stock
Incentive Plan".
On December 8, 1997, the Company granted to each of Messrs. Bodman, Davoli,
O'Connor and Strohm an option to purchase 20,000 shares of Common Stock at an
exercise price of $7.00 per share. The options are immediately exercisable for
all of the option shares. However, the shares purchasable upon exercise of the
options are unvested and subject to repurchase, at the option exercise price
paid per share, upon the early termination of the optionee's Board service. The
shares subject to each option grant will vest as to 25% of the option shares
upon the optionee's completion of each of the four years of Board service after
the grant date. The options have a maximum term of 10 years measured from the
grant date, subject to earlier termination following the cessation of the
optionee's Board service. The options will immediately vest in the event of (i)
certain changes in the ownership or control of the Company, unless such options
are assumed by the successor corporation or (ii) the death or disability of the
optionee while serving as a Board member.
The Bylaws provide for indemnification of directors and officers to the
fullest extent permitted by Delaware law, except if limited by contract. Prior
to consummation of this Offering, the Company will enter into indemnification
agreements with all of its directors and will procure directors' and officers'
liability insurance. In addition, the Charter limits the personal liability of
Board members to the Company or its stockholders for breaches of the directors'
fiduciary duties to the fullest extent permitted by Delaware law. See
"Description of Capital Stock -- Certain Anti-Takeover, Limited Liability and
Indemnification Provisions".
EMPLOYMENT CONTRACTS
The officers serve at the discretion of the Board. The Company does not
presently have an employment contract in effect with any of its executive
officers. The Compensation Committee, as Plan
43
<PAGE> 45
Administrator of the 1995 Plan, has the authority to provide for the accelerated
vesting of the shares of Common Stock subject to outstanding options held by the
Chief Executive Officer and the Company's other executive officers or any
unvested shares actually held by those individuals under the 1995 Plan, in the
event the Company is acquired by merger, consolidation or asset sale or there is
a change in control effected by a successful tender or exchange offer for more
than 50% of the Company's outstanding voting securities or a change in the
majority of the Board as a result of one or more contested elections for Board
membership. Alternatively, the Compensation Committee may condition such
accelerated vesting upon the individual's position with the Company being
replaced with a lesser position or the termination of the individual's service
within a designated period following the acquisition or take over. In addition,
the Company has agreements with certain management members regarding
acceleration of option vesting in the event of the consummation of a transaction
that results in a change of control of the Company.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning the compensation earned by the Company's Chief Executive
Officer and certain other executive officers of the Company (collectively, the
"Named Officers") whose salary and bonus exceeded $100,000 for services rendered
in all capacities to the Company and its subsidiaries during 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION OPTIONS
--------------------- (# OF
NAME AND PRINCIPAL POSITION(S) SALARY BONUS SHARES)
- ------------------------------ -------- -------- ------------
<S> <C> <C> <C>
Thomas E. Noonan.................................... $130,000 $ (1) --
President, Chief Executive Officer and Chairman of
the Board
Alex Bogaerts....................................... 86,000(2) 114,870(2) 25,000
Vice President (Europe)
H. Keith Cooley..................................... 109,000 26,000 --
Vice President (Engineering)
Lin Ja Hong......................................... 110,000 43,890 27,500
Vice President (Asia/Pacific)
M. Thomas McNeight.................................. 125,000 91,300 --
Vice President (Americas Sales)
</TABLE>
- ---------------
(1) To be determined.
(2) Mr. Bogaerts' compensation, other than options, was paid to a consulting
company owned by Mr. Bogaerts.
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<PAGE> 46
Option Grants in Last Fiscal Year. The following table provides certain
information concerning stock options granted to each of the Named Officers
during 1997. No stock appreciation rights were granted to these individuals
during such year.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO PRICE TERM(2)
OPTIONS EMPLOYEES PER EXPIRATION --------------------------
NAME GRANTED(1) IN 1997 SHARE DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Noonan............. -- --% $ -- -- $ -- $ --
Alex Bogaerts................ 25,000 2.3 0.60 4/20/07 9,433 23,906
H. Keith Cooley.............. -- -- -- -- -- --
Lin Ja Hong.................. 20,000 1.8 0.60 3/9/07 7,547 19,125
7,500 * 7.00 12/30/07 33,016 83,671
M. Thomas McNeight........... -- -- -- -- -- --
</TABLE>
- ---------------
* Indicates less than 1%.
(1) The options are immediately exercisable in full upon grant; however, the
shares underlying all options vest over a four-year period at the rate of
25% per year and are subject to repurchase by the Company at the exercise
price should the optionee cease employment prior to full vesting. In the
event that the Company is acquired by merger, consolidation or asset sale,
the option shares will accelerate in full unless the option is assumed by
the successor corporation and the Company's repurchase rights with respect
to the unvested option shares are assigned to such corporation. In the event
that the option is so assumed by, and the Company's repurchase rights with
respect to unvested shares are assigned to, the successor corporation and,
within 12 months following the acquisition, the optionee's position is
reduced to a lesser position or the optionee's employment is involuntarily
terminated, the option shares will accelerate in part so that the next
annual installment of option shares scheduled to vest will immediately vest
in full and, to the extent the optionee continues in the Company's service,
each installment of option shares scheduled to vest thereafter will vest on
each subsequent anniversary of the acceleration date. Each option expires on
the earlier of (i) ten years from the date of grant, or (ii) termination of
the optionee's employment with the Company. All options were granted at fair
market value as determined by the Board of Directors of the Company on the
date of grant.
(2) Future value assumes appreciation in the market value of the Common Stock of
5% and 10% per year over the ten-year option period as mandated by the rules
and regulations of the Commission and does not represent the Company's
estimate or projection of the future value of the Common Stock. The actual
value realized may be greater than or less than the potential realizable
values set forth in the table.
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<PAGE> 47
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values. No options were exercised by the Named Officers during 1997. The
following table provides certain information concerning option exercises and
option holdings for the fiscal year ended December 31, 1997 with respect to each
of the Named Officers.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(2)
------------------------------- ---------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Thomas E. Noonan...................... -- -- $ -- $ --
Alex Bogaerts......................... 45,000(3) -- 297,000 --
H. Keith Cooley....................... 200,000 -- 1,370,000 --
Lin Ja Hong........................... 27,500(4) -- 128,000 --
M. Thomas McNeight.................... 235,000 -- 1,609,750 --
</TABLE>
- ---------------
(1) The shares purchasable upon exercise of the options are subject to
repurchase by the Company at the exercise price upon the optionee's
termination of employment prior to vesting in the shares. The Company's
repurchase right lapses with respect to, and the optionee vests in, 25% of
the option shares upon the optionee's completion of each year of service. As
of December 31, 1997, the number of vested shares for which each Named
Officer's option was exercisable was as follows: Mr. Bogaerts -- 5,000
shares; Mr. Cooley -- 50,000; Mr. Lin -- no shares; Mr. McNeight -- 58,750
shares.
(2) Value determined by subtracting the exercise price from the fair market
value of the Common Stock at December 31, 1997 ($7.00 per share), as
determined by the Company's Board of Directors, multiplied by the number of
shares underlying the options.
(3) Represents options for 20,000 shares at an exercise price of $0.15 per share
and options for 25,000 shares at an exercise price of $0.60 per share.
(4) Represents options for 20,000 shares at an exercise price of $0.60 per share
and options for 7,500 shares at an exercise price of $7.00 per share.
RESTATED 1995 STOCK INCENTIVE PLAN
The Restated 1995 Stock Incentive Plan was first adopted by the Board of
Directors of Internet Security Systems, Inc. on September 6, 1995 and approved
by the stockholders of Internet Security Systems, Inc. on January 31, 1996. On
December 8, 1997, the Company assumed the 1995 Plan and all outstanding options
thereunder and converted such options on a share-for-share basis into options to
purchase shares of the Company's Common Stock. Three million shares of Common
Stock have been authorized for issuance under the 1995 Plan. In addition, the
share reserve will automatically be increased on the first trading day of each
calendar year, beginning with the 1999 calendar year, by an amount equal to 3%
of the number of shares of Common Stock outstanding on the last trading day of
the immediately preceding calendar year. In no event may any one participant in
the 1995 Plan receive option grants or direct stock issuances for more than
300,000 shares per calendar year.
The 1995 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price equal to, greater than or less than their fair
market value on the grant date, (ii) the Stock Issuance Program under which such
individuals may, in the Plan Administrator's discretion, be issued shares of
Common Stock directly, through the purchase of such shares at a price equal to,
greater than or less than their fair market value at the time of issuance or as
a bonus for services rendered, and (iii) the Automatic Option Grant Program
under which option grants will automatically be made at periodic intervals to
eligible non-employee Board members to
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<PAGE> 48
purchase shares of Common Stock at an exercise price equal to 100% of the fair
market value of such shares on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee of the Board. The Compensation
Committee as Plan Administrator has complete discretion to determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option under
the Federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the Automatic Option Grant Program is
self-executing in accordance with the express provisions of such program.
The exercise price for the shares of Common Stock subject to option grants
made under the 1995 Plan may be paid in cash or in shares of Common Stock (held
for the requisite period necessary to avoid a charge to the Company's earnings
for financial reporting purposes) valued at fair market value on the exercise
date. The option may also be exercised through a same-day sale program without
any cash outlay by the optionee. In addition, the Plan Administrator may provide
financial assistance to one or more optionees in the exercise of their
outstanding options by allowing such individuals to deliver a full-recourse,
interest-bearing promissory note in payment of the exercise price and any
associated withholding taxes incurred in connection with such exercise. During
the 180-day period following the date of this Prospectus, optionees exercising
options under the 1995 Plan will be required to enter into Lock-Up Agreements
with the representatives of the Underwriters.
In the event that the Company is acquired by merger, consolidation or asset
sale, each outstanding option under the Discretionary Option Grant Program which
is not to be assumed by the successor corporation will automatically become
fully exercisable, and all unvested shares under the Stock Issuance Program will
immediately vest, except to the extent the Company's repurchase rights with
respect to those shares are to be assigned to the successor corporation. In the
event an outstanding option is assumed, and the Company's repurchase rights are
assigned to the successor corporation, and, within 12 months following the
merger, consolidation or asset sale either (i) the optionee is offered a lesser
position compared to the position held by the optionee prior to the acquisition
or (ii) the optionee's service is terminated, either involuntarily or through
resignation as a result of being offered a lesser position, then the option will
accelerate in part so that it will become immediately exercisable with respect
to the next annual installment of option shares scheduled to vest. The Plan
Administrator also has the authority under the Discretionary Option Grant and
Stock Issuance Programs to grant options and to structure repurchase rights so
that the shares subject to those options or repurchase rights will automatically
vest in the event the individual is offered a lesser position or the
individual's service is terminated, whether involuntarily or through a
resignation as a result of being offered a lesser position, within a specified
period (not to exceed 12 months) following a change in control of the Company
effected by a successful tender offer for more than 50% of the outstanding
voting stock or by proxy contest for the election of Board members. The Plan
Administrator also has the discretion to provide for the automatic acceleration
of outstanding options and the lapse of any outstanding repurchase rights upon
certain changes in the ownership or control of the Company.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election,
subject to the Plan Administrator's approval, to surrender their outstanding
options for an appreciation distribution from the Company equal to the excess of
(i) the fair market value of the vested shares of Common Stock subject to the
surrendered option over (ii) the aggregate exercise price payable for such
shares. In addition, the Plan Administrator has the authority to grant to
certain officers and directors of the Company limited stock appreciation rights
which, upon a hostile take-over of the Company (as defined in the 1995 Plan),
generally provide the holders with the automatic right to surrender his or her
outstanding options for an appreciation distribution from the Company equal to
the excess of (i) the tender price paid in the hostile take-over for the vested
shares
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<PAGE> 49
subject to the surrendered options over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may be made in cash or
in shares of Common Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program with the
consent of the affected option holders in return for the grant of new options
for the same or different number of option shares with an exercise price per
share based upon the fair market value of the Common Stock on the new grant
date.
Under the Automatic Option Grant Program, each individual who first joins
the Board as a non-employee Board member after the effective date of this
Offering will receive an option to purchase 50,000 shares of Common Stock on the
date he or she is first elected or appointed to the Board, provided such
individual has not otherwise been in the prior employ of the Company. In
addition, at each Annual Stockholders Meeting, beginning with the 1999 Annual
Meeting, each individual who is to continue to serve as a non-employee Board
member after the meeting will receive an additional option to purchase 5,000
shares of Common Stock.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
initial 50,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional
5,000-share grant will vest in two equal and successive annual installments over
the optionee's period of Board service measured from the grant date. However,
the shares subject to each outstanding automatic grant will immediately vest
upon (i) certain changes in the ownership or control of the Company or (ii) the
death or disability of the optionee while serving as a Board member.
The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on the earlier of (i) September 6, 2005, (ii) the date on which all
available shares have been issued as vested shares or (iii) the termination of
all outstanding options in connection with certain changes in the ownership or
control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board established a Compensation Committee in February 1996. During
1997, Robert E. Davoli, Kevin J. O'Connor and David N. Strohm served as members
of the Compensation Committee. None of these individuals has served at any time
as an officer or employee of the Company. Prior to the establishment of the
Compensation Committee, all decisions relating to executive compensation were
made by the Board. For a description of the transactions between the Company and
members of the Compensation Committee and entities affiliated with such members,
see "Certain Transactions". No executive officer of the Company serves as a
member of the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Board of Directors
or Compensation Committee.
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<PAGE> 50
CERTAIN TRANSACTIONS
In February 1996 the Company sold an aggregate of 3,650,000 shares of
Series A Preferred Stock for $1.00 per share. The purchasers of record of the
Series A Preferred Stock included, among others, Greylock Equity Limited
Partnership ("Greylock"), and Sigma Associates III, L.P., Sigma Investors III,
L.P. and Sigma Partners III, L.P. (collectively, the "Sigma Entities").
In connection with the sale of the Company's Series A Preferred Stock, the
Company entered into an agreement with Greylock and the Sigma Entities
concerning certain of the shares of the Common Stock sold by the underwriters of
an initial public offering of the Common Stock to persons designated by the
Company ("Directed Shares"). Under this agreement, in the event that the Company
designates any person to receive Directed Shares, the Company must use its best
efforts to cause (i) Greylock and (ii) the Sigma Entities to receive up to
100,000 shares of the Company's Common Stock sold in such offering at the
initial public offering price. Also in connection with the sale of the Company's
Series A Preferred Stock, the Company repurchased 100,000 shares of Common Stock
from Christopher W. Klaus for $15,000.
In February 1997 the Company sold an aggregate of 2,086,957 shares of
Series B Preferred Stock for $2.53 per share. The purchasers of record of the
Series B Preferred Stock included, among others, (i) Greylock, (ii) the Sigma
Entities and (iii) Kleiner Perkins Caufield & Byers VIII, KPCB Information
Sciences Zaibatsu Fund II and KPCB Java Fund. In connection with the sale of the
Company's Series B Preferred Stock, the Company entered into an agreement with
AT&T Ventures ("AT&T") and Kleiner, Perkins, Caufield & Byers ("KPCB")
concerning Directed Shares. In the event that the Company designates any person
to receive Directed Shares, the Company must use its best efforts to cause each
of AT&T and KPCB to receive up to 100,000 shares of the Company's Common Stock
sold in such offering at the initial public offering price.
Pursuant to the terms of the Series A and Series B Preferred Stock Purchase
Agreements, David N. Strohm, a General Partner of Greylock, and Robert E.
Davoli, who is affiliated with the Sigma Entities, became directors of ISS. See
"Principal and Selling Stockholders".
On December 8, 1997, the Company's Board of Directors granted to each of
Richard S. Bodman, Robert E. Davoli, Kevin J. O'Connor and David N. Strohm (the
Company's non-employee directors) a non-statutory option to purchase up to
20,000 shares of the Company's Common Stock outside the 1995 Plan, on the same
terms as if those options had been granted pursuant to the Company's Automatic
Option Grant Program under the 1995 Plan. See "Management -- Restated 1995 Stock
Incentive Plan".
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board, including a majority of the independent and
disinterested outside directors on the Board, and will continue to be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
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<PAGE> 51
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of January 15, 1998 adjusted on a pro forma
basis to reflect the automatic conversion of each share of Convertible Preferred
Stock into one share of Common Stock, and as adjusted to reflect the sale of
shares offered hereby, by (i) each person who is known by the Company to own
beneficially more than five percent of the Common Stock, (ii) each of the
Company's Named Officers and directors, (iii) all current officers and directors
as a group, and (iv) each of the Selling Stockholders. Unless otherwise
indicated, the address for the following stockholders is 41 Perimeter Center
East, Suite 660, Atlanta, Georgia 30346.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
OFFERING (1)(2) NUMBER OF OFFERING(1)(2)
------------------------ SHARES OFFERED -------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE FOR SALE NUMBER PERCENTAGE
- ---------------- ----------- ---------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Christopher W. Klaus(3)....... 4,373,836 32.0% 100,000 4,273,836 26.9%
Greylock Equity Limited
Partnership(4).............. 2,657,614 19.4 -- 2,637,614 16.6
755 Page Mill Road
Building A, Suite 100
Palo Alto, California 94304
Sigma Entities(5)............. 1,930,218 14.1 -- 1,930,218 12.2
20 Custom House Street
Suite 830
Boston, Massachusetts 02110
Thomas E. Noonan(6)........... 1,922,070 14.1 125,000 1,797,070 11.3
Kleiner Perkins Caufield &
Byers Entities(7)........... 1,429,858 10.5 -- 1,429,858 9.0
2750 Sand Hill Road
Menlo Park, California 94025
Kevin J. O'Connor(8).......... 713,475 5.2 55,000 658,475 4.1
DoubleClick
41 Madison Avenue
32nd floor
New York, New York 10010
Alex Bogaerts(9).............. 45,000 * -- 45,000 *
H. Keith Cooley(10)........... 200,000 1.4 20,000 180,000 1.1
Lin Ja Hong(11)............... 27,500 * -- 27,500 *
M. Thomas McNeight(12)........ 235,000 1.7 -- 235,000 1.5
Richard S. Bodman(13)......... 395,494 2.9 -- 395,494 2.5
c/o AT&T Ventures, L.L.C.
Two Wisconsin Circle
Suite 610
Chevy Chase, Maryland 20815
Robert E. Davoli(6)........... 1,950,218 14.2 -- 1,950,218 12.3
David N. Strohm(4)............ 2,657,614 19.4 -- 2,657,614 16.7
All directors and officers as
a group(11 persons)(14)..... 12,645,207 87.8 12,345,207 74.5
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option.
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<PAGE> 52
(2) Beneficial ownership is calculated in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable or
become exercisable within 60 days following January 15, 1998, are deemed
outstanding. However, such shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable.
(3) Includes 3,560 shares held by Mr. Klaus' family. In addition to the number
of shares shown as offered for sale in the table, Mr. Klaus has granted the
Underwriters the right to purchase up to an additional 25,000 shares
pursuant to the Underwriters' over-allotment option.
(4) Includes options immediately exercisable for 20,000 shares of Common Stock
held by Mr. Strohm and 2,637,614 shares held by Greylock Equity Limited
Partnership. Mr. Strohm, a director of the Company, is also a General
Partner of Greylock Equity Limited Partnership. Mr. Strohm disclaims
beneficial ownership of the shares held by Greylock Equity Limited
Partnership except to the extent of his pecuniary interest therein arising
from his general partnership interest therein.
(5) Includes options immediately exercisable for 20,000 shares of Common Stock
held by Mr. Davoli, 311,506 shares held by Sigma Associates III, L.P.,
28,792 shares held by Sigma Investors III, L.P. and 1,589,920 shares held
by Sigma Partners III, L.P. Mr. Davoli, a director of the Company, is also
a General Partner of Sigma Management III, L.P., which is the General
Partner of Sigma Associates III, L.P., Sigma Investors III, L.P. and Sigma
Partners III, L.P. Mr. Davoli disclaims beneficial ownership of the shares
held by Sigma Associates III, L.P., Sigma Investors III, L.P. and Sigma
Partners III, L.P. except to the extent of his pecuniary interest therein
from his general partnership interest in Sigma Management III, L.P.
(6) Includes 175,000 shares held in family trusts. In addition to the number of
shares shown as offered for sale in the table, Mr. Noonan has granted the
Underwriters the right to purchase up to an additional 25,000 shares
pursuant to the Underwriters' over-allotment option.
(7) Includes 393,211 shares held by Kleiner Perkins Caufield & Byers VIII,
35,746 shares held by KPCB Information Sciences Zaibatsu Fund II and
1,000,901 shares held by KPCB Java Fund.
(8) Includes options immediately exercisable for 20,000 shares of Common Stock.
In addition to the number of shares shown as offered for sale in the table,
Mr. O'Connor has granted the Underwriters the right to purchase up to an
additional 15,000 shares pursuant to the Underwriters' over-allotment
option.
(9) Includes options immediately exercisable for 45,000 shares of Common Stock.
(10) Includes options immediately exercisable for 180,000 shares of Common
Stock.
(11) Includes options immediately exercisable for 27,500 shares of Common Stock.
(12) Includes options immediately exercisable for 235,000 shares of Common
Stock.
(13) Includes options immediately exercisable for 20,000 shares of Common Stock
and 337,945 shares held by AT&T Venture Fund II, L.P. and 37,549 shares
held by Venture Fund I, L.P. for which Mr. Bodman serves as a General
Partner.
(14) Includes options immediately exercisable for 692,500 shares of Common
Stock.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $0.001 per share, and 20,000,000 shares of Preferred
Stock, par value $0.001 per share ("Preferred Stock"). Upon consummation of this
Offering, no shares of Preferred Stock and 15,878,428 shares of Common Stock
(16,188,428 shares if the Underwriters' overallotment option is exercised in
full) will be outstanding. The following summary is qualified in its entirety by
reference to the Company's Charter and Bylaws, copies of which are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of December 31, 1997, there were 7,921,471 shares of Common Stock
outstanding that were held by 8 stockholders. The holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In addition, the Company's
bank credit facility permits the payment of cash dividends only to the extent
the Company maintains certain financial ratios and a specified minimum net
worth. See "Dividend Policy". In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any
shares of Preferred Stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), which subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless (i) prior to such date, the
board of directors of the corporation approved either the business combination
or the transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by
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<PAGE> 54
persons who are directors and also officers and (y) by employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer, or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary of the
corporation and any other person or entity, (ii) subject to certain exceptions,
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation or any majority-owned subsidiary of the corporation involving
the interested stockholder, (iii) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation or any
majority-owned subsidiary of the corporation of any stock of the corporation to
the interested stockholder, (iv) any transaction involving the corporation or
any majority-owned subsidiary of the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of the
corporation or any majority-owned subsidiary of the corporation beneficially
owned by the interested stockholder, or (v) the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or any majority-owned
subsidiary of the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more or the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person.
CHARTER AND BYLAW PROVISIONS
The Company's Charter and Bylaws include provisions that may have the
effect of discouraging, delaying or preventing a change in control of the
Company or an unsolicited acquisition proposal that a stockholder might consider
favorable, including a proposal that might result in the payment of a premium
over the market price for the shares held by stockholders. These provisions are
summarized in the following paragraphs.
CLASSIFIED BOARD OF DIRECTORS
The Charter and Bylaws provide, beginning with the first annual meeting of
stockholders following this Offering, for the Board to be divided into three
classes of directors serving staggered, three-year terms. The classification of
the Board has the effect of requiring at least two annual stockholder meetings,
instead of one, to replace a majority of members of the Board.
SUPERMAJORITY VOTING
The Charter requires the approval of the holders of at least 66 2/3% of the
Company's combined voting power to effect certain amendments to the Charter
unless such amendments are approved by a majority of the directors of the
Company not affiliated or associated with any person holding (or which has
announced an intention to acquire) 26% or more of the voting power of the
Company's outstanding capital stock. The Bylaws may be amended by either (a) a
majority of the Board or (b) the holders of a majority of the Company's voting
stock, provided that certain amendments approved by stockholders require the
approval of at least 66 2/3% of the Company's combined voting power unless such
amendments are approved by a majority of the directors of the Company not
affiliated or associated with any person holding (or which has announced an
intention to acquire) 26% or more of the voting power of the Company's
outstanding capital stock.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 20,000,000 shares of Preferred Stock. No Preferred Stock will
be designated upon consummation of this Offering. After this Offering, the
Company will have outstanding 15,878,428 shares of Common Stock (16,188,428
shares if the Underwriters' over-allotment option is exercised in full). The
authorized but unissued (and in the case of Preferred Stock, undesignated) stock
may be issued by the Board in one or
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<PAGE> 55
more transactions. In this regard, the Company's Charter grants the Board broad
power to establish the rights and preferences of authorized and unissued
Preferred Stock. The issuance of shares of Preferred Stock pursuant to the
Board's authority described above could decrease the amount of earnings and
assets available for distribution to holders of Common Stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deferring or preventing a change in control of the
Company. The Board does not currently intend to seek stockholder approval prior
to any issuance of Preferred Stock, unless otherwise required by law.
SPECIAL MEETINGS OF STOCKHOLDERS
The Bylaws provide that special meetings of stockholders of the Company may
be called only by the Board, or by the Company's Chairman of the Board or
President.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Charter and the Bylaws provide that an action required or permitted to
be taken at any annual or special meeting of the stockholders of the Company may
only be taken at a duly called annual or special meeting of stockholders. This
provision prevents stockholders from initiating or effecting any action by
written consent, and thereby taking actions opposed by the Board.
NOTICE PROCEDURES
The Bylaws establish advance notice procedures with regard to all
stockholder proposals, including proposals relating to the nomination of
candidates for election as directors, the removal of directors and amendments to
the Charter or Bylaws to be brought before meetings of stockholders of the
Company. These procedures provide that notice of such stockholder proposals must
be timely given in writing to the Secretary of the Company prior to the meeting.
Generally, to be timely, notice must be received by the Secretary of the Company
not less than 120 days prior to the meeting. The notice must contain certain
information specified in the Bylaws.
OTHER ANTI-TAKEOVER PROVISIONS
See "Management -- Restated 1995 Stock Incentive Plan" for a discussion of
certain provisions of the 1995 Plan which may have the effect of discouraging,
delaying or preventing a change in control of the Company or unsolicited
acquisition proposals.
LIMITATION OF DIRECTOR LIABILITY
The Charter limits the liability of directors of the Company (in their
capacity as directors but not in their capacity as officers) to the Company or
its stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, which relates to unlawful payments of
dividends or unlawful stock repurchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
INDEMNIFICATION ARRANGEMENTS
The Bylaws provide that the directors and officers of the Company shall be
indemnified and provide for the advancement to them of expenses in connection
with actual or threatened proceedings and claims arising out of their status as
such, to the fullest extent permitted by the Delaware General Corporation Law.
Prior to consummation of this Offering, the Company will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.
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<PAGE> 56
REGISTRATION RIGHTS
Following the closing of the Offering, certain existing stockholders of the
Company holding an aggregate of 13,354,928 shares of Common Stock will be
entitled to certain rights with respect to the registration of such shares of
Common Stock held by them under the Securities Act. Under the terms of the
Rights Agreement between the Company and certain existing stockholders,
beginning six months after this Offering, the existing holders of Convertible
Preferred Stock have the right, subject to certain conditions and limitations,
to require the Company to file a registration statement, including, if
requested, a shelf registration statement, under the Securities Act in order to
register all or part of the existing stockholders' shares of Common Stock. The
Company may in certain circumstances defer such registrations and the
underwriters have the right, subject to certain limitations, to limit the number
of shares included in such registrations. In the event that the Company proposes
to register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, certain of the existing
stockholders of Common Stock and Convertible Preferred Stock are entitled to
include their shares of Common Stock in such registration, subject to marketing
and other limitations. Generally, the Company is required to bear the expense of
all such registrations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
.
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<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 15,878,428 of
Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options under the Company's
1995 Plan or other options after December 31, 1997). Of such shares, the
2,500,000 shares sold in this Offering will be freely transferable without
restriction or further registration under the Securities Act, except for any
shares held by an existing "affiliate" of the Company, as that term is defined
by the Securities Act (an "Affiliate"), which shares will be subject to the
resale limitations of Rule 144 adopted under the Securities Act. As of the date
of this Prospectus, 13,378,428 "restricted shares" as defined in Rule 144 will
be outstanding. Of such shares, and without consideration of the contractual
restrictions described below, 262,890 shares would be available for immediate
sale in the public market without restriction pursuant to Rule 144(k). Beginning
90 days after the date of this Prospectus, and without consideration of the
contractual restrictions described below, 13,108,538 shares would be eligible
for sale in reliance upon Rule 144 promulgated under the Securities Act and
27,000 shares would be eligible for sale in reliance upon Rule 701 promulgated
under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a person (or persons whose shares are aggregated) who owns shares
that were purchased from the Company (or any Affiliate) at least one year
previously, including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of the Common Stock
(approximately 158,785 shares immediately after the Offering) or (ii) the
average weekly trading volume of the Common Stock on the Nasdaq National Market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from the
Company (or any Affiliate) at least two years previously, would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the Commission has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 90 days after the
date of this Prospectus, may be sold (i) by persons other than Affiliates,
subject only to the manner of sale provisions of Rule 144, and (ii) by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.
All stockholders of the Company, including the officers, directors and
Selling Stockholders, have agreed not to sell any of their shares of Common
Stock for 180 days after the date of this Prospectus without the prior written
consent of the representatives of the Underwriters. As a result of these
contractual restrictions and subject to the provisions of Rules 144(k), 144 and
701, as applicable, 15,878,428 shares will be eligible for sale upon expiration
of the Lock-Up Agreements 180 days after the date of this Prospectus. See
"Underwriting".
The Company has agreed not to offer, sell or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire
56
<PAGE> 58
Common Stock for a period of 180 days after the date of this Prospectus, without
the prior written consent of the representatives of the Underwriters, subject to
certain limited exceptions. See "Underwriting".
After the Offering, the holders of 13,354,928 shares of Common Stock or
their respective transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights". Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by Affiliates)
immediately upon the effectiveness of such registration.
The Company intends to file a registration statement under the Securities
Act covering approximately 3,000,000 shares of Common Stock reserved for
issuance under the 1995 Plan. See "Management -- Restated 1995 Stock Incentive
Plan". Such registration statement is expected to be filed within 90 days after
the date of this Prospectus and will automatically become effective upon filing.
Following such filing, shares registered under such registration statement will,
subject to the Lock-Up Agreements, Rule 144 volume limitations applicable to
Affiliates and the lapsing of the Company's repurchase rights, be available for
sale in the open market upon the exercise of vested options 90 days after the
effective date of this Prospectus. At December 31, 1997, options to purchase
1,803,850 shares were issued and outstanding under the 1995 Plan and options to
purchase 80,000 shares were issued and outstanding outside of the 1995 Plan.
57
<PAGE> 59
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Austin, Texas. Certain legal matters
in connection with the offering will be passed upon for the Underwriters by
Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document are not necessarily complete;
reference is made in each instance to the copy of such contract or any other
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Commission. The Commission also maintains a Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
address http://www.sec.gov.
58
<PAGE> 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT AUDITORS
Board of Directors
ISS Group, Inc.
We have audited the accompanying consolidated balance sheets of ISS Group,
Inc. (formerly Internet Security Systems, Inc.) as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ISS Group, Inc.
at December 31, 1996 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
January 13, 1998
F-2
<PAGE> 62
ISS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
PRO FORMA
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,007,000 $ 3,929,000 $ 3,929,000
Accounts receivable, less allowance for doubtful
accounts of $79,000, $255,000 and $255,000,
respectively................................. 1,949,000 4,038,000 4,038,000
Prepaid expenses and other current assets....... 128,000 281,000 281,000
----------- ----------- -----------
Total current assets.................... 4,084,000 8,248,000 8,248,000
Property and equipment:
Computer equipment.............................. 267,000 1,688,000 1,688,000
Office furniture and equipment.................. 59,000 268,000 268,000
Leasehold improvements.......................... 15,000 15,000 15,000
----------- ----------- -----------
341,000 1,971,000 1,971,000
Less accumulated depreciation................... 68,000 402,000 402,000
----------- ----------- -----------
273,000 1,569,000 1,569,000
Other assets...................................... 23,000 49,000 49,000
----------- ----------- -----------
Total assets............................ $ 4,380,000 $ 9,866,000 $ 9,866,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................ $ 341,000 $ 2,002,000 $ 2,002,000
Accrued expenses................................ 731,000 1,798,000 1,798,000
Deferred revenues............................... 644,000 2,106,000 2,106,000
Current portion of long term debt............... 70,000 70,000 70,000
----------- ----------- -----------
Total current liabilities............... 1,786,000 5,976,000 5,976,000
Long term debt.................................... 140,000 70,000 70,000
Commitments and contingencies..................... -- -- --
Redeemable, Convertible Preferred Stock (5,737,000
shares authorized):
Series A; $.001 par value; 3,650,000 issued
and outstanding (historical), none issued
or outstanding (pro forma) (liquidation
preference $1 per share)................... 3,614,000 3,621,000 --
Series B; $.001 par value; 2,087,000 issued
and outstanding (historical), none issued
or outstanding (pro forma) (liquidation
preference $2.53 per share)................ -- 5,257,000 --
Stockholders' equity (deficit):
Preferred Stock; $.001 par value; 20,000,000
shares authorized (including 5,737,000
designated as Redeemable, Convertible
Preferred Stock), none issued or
outstanding.................................. -- -- --
Common Stock, $.001 par value, 50,000,000 shares
authorized, 7,902,000 and 7,921,000 shares
issued and outstanding (historical),
13,658,000 shares issued and outstanding (pro
forma)....................................... 8,000 8,000 14,000
Additional paid-in capital...................... 103,000 124,000 8,996,000
Accumulated deficit............................. (1,271,000) (5,190,000) (5,190,000)
----------- ----------- -----------
Total stockholders' equity (deficit).... (1,160,000) (5,058,000) 3,820,000
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)...................... $ 4,380,000 $ 9,866,000 $ 9,866,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 63
ISS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Licenses............................................ $ 246,000 $ 4,233,000 $10,936,000
Support services.................................... 11,000 229,000 2,531,000
--------- ----------- -----------
257,000 4,462,000 13,467,000
Costs and expenses:
Cost of revenues.................................... 4,000 18,000 676,000
Research and development............................ 97,000 1,225,000 3,434,000
Sales and marketing................................. 252,000 3,768,000 11,731,000
General and administrative.......................... 44,000 656,000 1,773,000
--------- ----------- -----------
397,000 5,667,000 17,614,000
--------- ----------- -----------
Operating loss........................................ (140,000) (1,205,000) (4,147,000)
Interest income....................................... -- 77,000 245,000
Interest expense...................................... -- (3,000) (17,000)
--------- ----------- -----------
Net loss.............................................. $(140,000) $(1,131,000) $(3,919,000)
========= =========== ===========
Unaudited pro forma net loss per share of Common
Stock............................................... $ (.28)
===========
Unaudited weighted average number of shares used in
calculating pro forma net loss per share of Common
Stock............................................... 14,181,000
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 64
ISS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
------------------ PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
--------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994........ 4,586,000 $5,000 $ (5,000) $ 10,000 $ 10,000
Issuance of Common Stock to
investor, September 8,1995..... 1,293,000 1,000 49,000 -- 50,000
Issuance of Common Stock to
employees, December 29,1995.... 2,123,000 2,000 81,000 -- 83,000
Cash dividends.................... -- -- -- (10,000) (10,000)
Net loss.......................... -- -- -- (140,000) (140,000)
--------- ------ -------- ----------- -----------
Balance at December 31,1995......... 8,002,000 8,000 125,000 (140,000) (7,000)
Repurchase of Common Stock from
founder........................ (100,000) -- (15,000) -- (15,000)
Accretion related to Redeemable,
Convertible Preferred Stock.... -- -- (7,000) -- (7,000)
Net loss.......................... -- -- -- (1,131,000) (1,131,000)
--------- ------ -------- ----------- -----------
Balance at December 31,1996......... 7,902,000 8,000 103,000 (1,271,000) (1,160,000)
Accretion related to Redeemable,
Convertible Preferred Stock.... -- -- (11,000) -- (11,000)
Issuance of Common Stock.......... 19,000 -- 32,000 -- 32,000
Net loss.......................... -- -- -- (3,919,000) (3,919,000)
--------- ------ -------- ----------- -----------
Balance at December 31,1997......... 7,921,000 $8,000 $124,000 $(5,190,000) $(5,058,000)
========= ====== ======== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 65
ISS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................. $(140,000) $(1,131,000) $(3,919,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................ 4,000 66,000 334,000
Non-cash expense.................................... 83,000 -- 31,000
Changes in assets and liabilities:
Accounts receivable.............................. (148,000) (1,802,000) (2,089,000)
Prepaid expenses and other assets................ (3,000) (146,000) (179,000)
Accounts payable and accrued expenses............ 117,000 955,000 2,728,000
Deferred revenues................................ 37,000 607,000 1,462,000
--------- ----------- -----------
Net cash used in operating activities................. (50,000) (1,451,000) (1,632,000)
INVESTING ACTIVITIES
Purchases of property and equipment................... (23,000) (320,000) (1,630,000)
--------- ----------- -----------
Net cash used in investing activities................. (23,000) (320,000) (1,630,000)
FINANCING ACTIVITIES
Proceeds from (payments on) long term debt............ -- 210,000 (70,000)
Net proceeds from Redeemable, Convertible Preferred
Stock issuances..................................... -- 3,607,000 5,253,000
Proceeds from (payments on) notes payable to
shareholder......................................... 30,000 (30,000) --
Common Stock activities............................... 50,000 (15,000) 1,000
Cash dividends........................................ (10,000) -- --
--------- ----------- -----------
Net cash provided by financing activities............. 70,000 3,772,000 5,184,000
--------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents......................................... (3,000) 2,001,000 1,922,000
Cash and cash equivalents at beginning of year........ 9,000 6,000 2,007,000
--------- ----------- -----------
Cash and cash equivalents at end of year.............. $ 6,000 $ 2,007,000 $ 3,929,000
========= =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid......................................... $ -- $ 1,000 $ 17,000
========= =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 66
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of ISS Group,
Inc. and its subsidiaries ("the Company"). All significant intercompany
investment accounts and transactions have been eliminated in consolidation.
ISS Group, Inc. was incorporated in the State of Delaware on December 8,
1997 to be a holding company for Internet Security Systems, Inc., a Georgia
company incorporated on April 19, 1994 to design, market, and sell computer
network security assessment software. In March 1996, the Company formed Internet
Security Systems Europe NV ("ISS Europe"), of which the Company owns 99.96% of
the outstanding stock. In February 1997, the Company formed ISS Japan, KK, a
wholly owned subsidiary. These subsidiaries have primary marketing and sales
responsibilities for the Company's products in Europe and the Asia/Pacific
regions.
The financial statements of foreign subsidiaries have been translated into
United States dollars in accordance with Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 52 Foreign
Currency Translation. Revenues with international customers, except in Japan,
were denominated in U.S. dollars. Revenues from Japanese customers and
international expenditures were denominated in the respective local currencies
and translated using the average exchange rates for the year. The effect on the
statements of operations related to transaction gains and losses is
insignificant for all years presented. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date and the
effect of changes in exchange rates from year to year is insignificant.
The Company's business is focused on maintaining the latest security threat
and vulnerability checks within existing products and creating new products and
services that are consistent with the Company's goal of providing an adaptive
security management approach to network security. This approach entails
continuous security risk monitoring and response to develop an active and
informed network security policy.
REVENUE RECOGNITION
The Company recognizes its license revenue upon (i) delivery of software
or, if the customer has evaluation software, delivery of the software key, and
(ii) issuance of the related license, assuming no significant vendor obligations
or customer acceptance rights exist. In October 1997, the AICPA issued Statement
of Position ("SOP") No. 97-2, Software Revenue Recognition, which the Company
adopted, effective January 1, 1997. Such adoption had no effect on the Company's
methods of recognizing revenue from its license and maintenance activities.
Prior to 1997, the Company's revenue recognition policy was in accordance with
the preceding authoritative guidance provided by SOP No. 91-1, Software Revenue
Recognition.
Revenues from perpetual licenses are recorded as license revenues in the
statements of operations. Support service revenues include maintenance, term
license revenues, and professional services. Annual renewable maintenance is a
separate component of each contract, and is recognized ratably over the contract
term. Term licenses, which allow customer use of the product and maintenance for
a specified period, generally twelve months, are also recognized ratably over
the contract term. Professional services revenues are recognized as such
services are performed.
F-7
<PAGE> 67
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Such amounts are
stated at cost which approximates market value.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains cash and cash equivalents with
two financial institutions. The Company's sales are primarily to companies
located in the United States, Europe and the Asia/Pacific regions. The Company
performs periodic credit evaluations of its customers' financial condition and
does not require collateral. Accounts receivable are due principally from large
U.S. companies under stated contract terms. The Company provides for estimated
credit losses at the time of sale. Such losses have not been significant to
date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method for financial reporting
purposes over the estimated useful lives of the assets (primarily three years).
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. The
Company has not capitalized any such development costs under SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, because the costs incurred by the Company between the attainment of
technological feasibility for the related software product through the date when
the product is available for general release to customers is insignificant.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. The Company incurred
$34,000, $485,000 and $572,000 of advertising costs for the years ended December
31, 1995, 1996 and 1997, respectively. Such amounts are included in sales and
marketing expense in the statements of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates, and such
differences may be material to the consolidated financial statements.
STOCK BASED COMPENSATION
The Company grants stock options generally for a fixed number of shares to
certain employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
stock option grants for which the terms are fixed. In October 1995, the FASB
issued SFAS No. 123, Accounting for Stock-Based Compensation, which provides an
alternative to APB Opinion No. 25 in accounting for stock-based compensation
issued to employees. As permitted by SFAS No. 123, the Company continues
F-8
<PAGE> 68
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION (CONTINUED)
to account for stock-based compensation in accordance with APB Opinion No. 25
and has elected the pro forma disclosure alternative of SFAS No. 123 (see Note
6).
PRO FORMA BALANCE SHEET (UNAUDITED)
In conjunction with an initial public offering of the Company's Common
Stock, all outstanding shares of Series A and Series B Redeemable, Convertible
Preferred Stock automatically convert into shares of Common Stock. As such, the
effect of the conversions has been reflected in the unaudited pro forma balance
sheet at December 31, 1997.
LOSS PER SHARE
In 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Because of the significant
impact of the assumed conversion of the Series A and Series B Redeemable,
Convertible Preferred Stock into Common Stock upon consummation of the initial
public offering of the Company's Common Stock on the Company's capital structure
and loss per share, historical loss per share information has been excluded from
the face of the statements of operations as it is not considered meaningful.
Unaudited pro forma net loss per share was computed by dividing net loss by
the unaudited weighted average number of shares of Common Stock outstanding
after giving retroactive effect to cheap stock, as defined below, and the
conversion of the 3,650,000 shares of Series A and 2,087,000 shares of Series B
Redeemable, Convertible Preferred Stock into 5,737,000 shares of Common Stock
which will occur upon consummation of the Company's initial public offering.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalents issued at prices
below the assumed initial public offering price per share ("cheap stock") during
the twelve-month period immediately preceding the initial filing date of the
Company's Registration Statement for its initial public offering have been
included in the calculation of unaudited pro forma net loss per share (using the
treasury stock method at the assumed initial public offering price) even though
the effect is to reduce the unaudited pro forma net loss per share.
Basic and diluted historical net loss per share (see Note 10) was computed
by dividing net loss plus accretion of the Series A and Series B Redeemable,
Convertible Preferred Stock by the weighted average number of shares of Common
Stock plus cheap stock using the treasury stock method at the assumed initial
public offering price of $10.00 per share. Common Stock equivalents were
antidilutive and therefore were not included in the computation of weighted
average shares used in computing diluted loss per share for the years ended
December 31, 1995, 1996 and 1997. Cheap stock, which includes the Series B
Redeemable, Convertible Preferred Stock, is included as outstanding for all
periods even though the effect is to reduce net loss per share for the years
ended December 31, 1995, 1996 and 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and displaying comprehensive income,
as defined, and its components in
F-9
<PAGE> 69
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
financial statements. The Company's adoption of SFAS No. 130 had no impact on
the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements for periods beginning after December 15,
1997. The Statement requires that business segment financial information be
reported in the financial statements utilizing the management approach. The
management approach is defined as the manner in which management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Management believes the adoption of SFAS No. 131 will not have a
material impact on the financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to the prior years' financial
statements to conform with the 1997 presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate their fair
values. The carrying amounts reported in the balance sheets for long-term debt
approximate their fair values as the interest rate related to such debt is
variable and commensurate with the Company's credit worthiness.
3. DEBT
At December 31, 1996 and 1997, the Company had outstanding balances of
$210,000 and $140,000, respectively, under an equipment line of credit. Interest
on such line accrues at 1.25% above the prime rate and is payable on a monthly
basis. Borrowings under the equipment line are secured by equipment and are due
in annual installments of $70,000 in 1998 and 1999.
At December 31, 1996, the Company had an unused $500,000 revolving line of
credit which matured on October 31, 1997 and was not renewed by the Company.
4. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
Redeemable, Convertible Preferred Stock consists of the following:
<TABLE>
<CAPTION>
SHARES ISSUED
GROSS NET AND
SERIES DATE OF ISSUANCE PROCEEDS PROCEEDS OUTSTANDING
- ------ ---------------- ---------- ---------- -------------
<C> <C> <C> <C> <C>
A February 2, 1996 $3,650,000 $3,607,000 3,650,000
B February 14, 1997 5,280,000 5,253,000 2,087,000
---------- ---------- ---------
$8,930,000 $8,860,000 5,737,000
========== ========== =========
</TABLE>
Accretion related to the Company's Series A and Series B Redeemable,
Convertible Preferred Stock was recorded over the respective redemption period
by charges against additional paid-in capital with corresponding increases to
the carrying value of the Series A and Series B Redeemable, Convertible
Preferred Stock. Such increases aggregated $7,000 and $11,000 for the years
ended December 31, 1996 and 1997, respectively.
F-10
<PAGE> 70
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. REDEEMABLE, CONVERTIBLE PREFERRED STOCK (CONTINUED)
The rights, preferences, qualifications, limitations, and restrictions of
the holders of the Series A and Series B Redeemable, Convertible Preferred Stock
are as follows:
a. Dividend Rights. Dividends as specifically declared by the
Company's Board of Directors are to be in preference to payment of any
dividend (other than dividends payable solely in Common Stock) with respect
to the Common Stock.
b. Liquidation Rights. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or not, Series A and
Series B holders shall be paid an amount equal to $1.00 per share and $2.53
per share, respectively, (adjusted for stock splits, combinations, or
similar events) plus, in each case, all declared and unpaid dividends, if
any, before any amount shall be paid to holders of Common Stock. Any
remaining assets and surplus funds shall be distributed ratably among the
holders of the Common Stock, the Series A Preferred Stock and the Series B
Preferred Stock on an as-converted basis. In no event shall the holders of
the Series A Preferred Stock and Series B Preferred Stock be entitled to
receive more than $2.00 and $5.06 per share, respectively, unless such
holders have converted their shares of Series A Preferred Stock or Series B
Preferred Stock into Common Stock prior to the occurrence of a liquidation,
dissolution or winding up of the Corporation.
c. Mandatory Redemption. If the Series A or Series B Preferred Stock
has not been redeemed or converted into Common Stock prior to September 30,
2000 each share of Series A and Series B Preferred Stock is redeemable at
the request of the holders of at least 51% of the outstanding shares. If
the redemption provisions are exercised, redemption will occur in stages in
the years 2001, 2002, and 2003. The redemption price is equal to the
original price plus all declared and unpaid dividends.
d. Voting Rights. The Series A and Series B Preferred Stock generally
vote equally with shares of Common Stock on an "as if converted" basis
except that the holders of Series A Preferred Stock, voting as a separate
series, shall elect two members of the Company's Board of Directors. The
holders of Common Stock and Series A and Series B Preferred Stock, voting
together as a class, shall elect all the remaining directors.
e. Protective Provisions. The Series A and Series B Preferred Stock
holders have certain protective provisions which prohibit the Company from
certain activities (e.g. sale of substantially all of the Company's assets,
changes to Series A and Series B instruments, dividend declarations,
creating new classes of Preferred Stock senior to the Series A or Series B
Preferred Stock) without first obtaining the approval of holders of at
least a majority of the then outstanding shares of the Series A and Series
B Preferred Stock holders, as defined.
f. Conversion. Shares of Series A and Series B Preferred Stock are
convertible, at the option of the holder, to Common Stock at any time at
the rate of one share of Common Stock for each share of Preferred Stock.
The Series A and Series B Preferred Stock automatically converts to Common
Stock upon the closing of (i) an underwritten public offering of the
Company's Common Stock in which the aggregate proceeds for such shares is
at least $10,000,000 and the per share price is at least $6.00 per share
(adjusted for any stock split, dividend, combination, recapitalization, or
the like) or (ii) the written election of holders of not less than a
majority of the then outstanding shares of such series.
In connection with the issuance of the Series A Preferred Stock, the
Company effected an 89.92-for-1 share stock split of its Common Stock. The
Company has designated 3,650,000 shares of the authorized Preferred Stock as
Series A Preferred Stock and 2,087,000 shares as Series B Preferred
F-11
<PAGE> 71
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. REDEEMABLE, CONVERTIBLE PREFERRED STOCK (CONTINUED)
Stock. All par value and share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the stock split and changes to the
articles of incorporation.
5. STOCKHOLDERS' EQUITY
On April 19, 1994, the Company issued 4,586,000 shares of Common Stock to
the founder in exchange for the assignment of technology previously developed
and distributed by the founder as shareware. In connection with the issuance of
Series A Preferred Stock (see Note 4), the founder entered into a Stock
Repurchase Agreement (the "Founder's Agreement") with the Company. Under the
Founder's Agreement the Company has the right to acquire, at fair market value,
up to 2,293,000 shares of the founder's Common Stock upon the founder's
separation from the Company, as defined. The Company's repurchase rights expire
ratably over a four year period beginning February 1, 1996 or upon the
consummation of an initial public offering of the Company's Common Stock.
On September 8, 1995, the Company issued 1,293,000 shares of Common Stock
to an investor for $50,000.
On December 29, 1995, the Company issued 2,123,000 shares of Common Stock
to two employees and recorded $83,000 of compensation expense. In connection
with the issuance of Series A Preferred Stock (see Note 4), the employees
entered into a Stock Repurchase Agreement (the "Agreement") with the Company.
Under the Agreement, the Company has the right to acquire, at fair market value,
up to 1,633,000 shares of such employees' Common Stock upon the employees'
separation from the Company, as defined. The Company's repurchase rights expire
ratably over a four year period beginning February 1, 1996 or upon the
consummation of an initial public offering of the Company's Common Stock.
On February 2, 1996 the Company acquired 100,000 shares of its Common Stock
from the founder for $15,000.
The Company has reserved 8,810,000 shares of Common Stock for future
issuance upon conversion of outstanding Series A and Series B Preferred Stock
and exercise of options to purchase Common Stock.
In December 1997, the Company commenced plans to offer up to 2,200,000 of
newly issued shares of Common Stock in an initial public offering plus 310,000
shares that the underwriters have the option to purchase to cover
over-allotments, if any.
6. STOCK OPTION PLANS
In 1995, the Company established the 1995 Incentive Stock Plan (the "Plan")
to provide for the granting of qualified or nonqualified options to purchase
shares of the Company's Common Stock. In 1997, the Company amended the Plan to
increase the number of shares reserved for future issuance under such plan to
3,000,000 shares.
Effective with the 1997 Plan amendment, options granted under the Plan
became immediately exercisable, subject to a right of repurchase by the Company
at the original exercise price for all unvested shares. Vesting occurs in equal
annual installments over four years, generally measured from the date of the
grant. Once an optionee vests in the shares underlying the option and until
certain events occur, including an initial public offering of the Company's
common stock, the Company has a right of first refusal to repurchase such shares
after an individual has received a bona fide third party offer with respect to
such vested shares. All options are issued at fair market value on the date of
grant. Fair market value of the Company's Common Stock, in the absence of
trading on a national or regional stock exchange, is determined by the Company's
Board of Directors.
F-12
<PAGE> 72
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
The Plan also includes an Automatic Option Grant Program (the "Program").
Under the Program, each individual who first joins the Company's Board of
Directors as a non-employee Board member after the effective date of an initial
public offering will receive an option to purchase 20,000 shares of Common Stock
on the date he or she is first elected or appointed to the Board of Directors,
provided such individual has not otherwise been in the prior employ of the
Company. In addition, at each annual stockholders' meeting, beginning with the
1999 annual meeting, each individual who is to continue to serve as a
non-employee Board of Directors member after the meeting will receive an
additional option to purchase 5,000 shares of Common Stock. Options under the
Program will be isssued at fair market value at the date of the grant.
On December 8, 1997, the Company's Board of Directors granted to each of
the Company's four non-employee directors a nonstatutory option to purchase up
to 20,000 shares of Common Stock outside the Plan, on the same terms as if those
options had been granted under the Program of the 1995 Plan. The Company
reserved 80,000 shares of Common Stock for issuance under these options.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............. -- $ -- 810,000 $ .16
Granted.................................... 810,000 .16 1,101,000 4.54
Exercised.................................. -- -- (7,000) .15
Canceled................................... -- -- (20,000) .41
-------- ----------
Outstanding at end of year................... 810,000 .16 1,884,000 2.71
======== ==========
Exercisable at end of year................... -- 1,884,000 2.71
======== ==========
Weighted average fair value of options
granted during the year.................... $ .04 $ 2.34
======== ==========
</TABLE>
The following table summarizes information concerning currently outstanding
options, all of which are exercisable:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
NUMBER OF
OPTIONS WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED
DECEMBER 31, REMAINING AVERAGE
RANGE OF EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ -------------- ---------------- --------------
<S> <C> <C> <C>
$.15-.60................................... 1,067,000 8.6 years... $ .28
$1.00-7.00................................. 817,000 9.9 years... 5.89
---------
1,884,000
=========
</TABLE>
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method prescribed by that
Statement. The fair value for options granted was estimated at the date of grant
using the Black-Scholes option pricing model. The following weighted average
assumptions were used for 1996 and 1997, respectively: risk-free interest rates
of 5.97% and 6.28%; no dividend yield; a .60 volatility factor; and an expected
life of the options of 4 years.
F-13
<PAGE> 73
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
different from those of traded options, and because the changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
option is amortized to expense over the options' vesting period. The following
pro forma information adjusts the net loss and unaudited pro forma net loss per
share of Common Stock for the impact of SFAS No. 123:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Unaudited pro forma net loss................................ $(3,975,000)
===========
Unaudited pro forma net loss per share as adjusted.......... $ (.28)
===========
</TABLE>
7. COMMITMENTS
In 1996, the Company entered into noncancellable operating leases for new
facilities that expire in July 2001. The Company has the option to extend the
terms of the leases for one additional five year term upon expiration of the
initial terms.
Future minimum payments under noncancellable operating leases with initial
terms of one year or more consisted of the following at December 31:
<TABLE>
<CAPTION>
OPERATING
LEASES
----------
<S> <C>
1998........................................................ $ 400,000
1999........................................................ 277,000
2000........................................................ 276,000
2001........................................................ 105,000
----------
Total minimum lease payments...................... $1,058,000
==========
</TABLE>
Rent expense was approximately $4,000, $105,000 and $401,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
8. INCOME TAXES
On January 1, 1996 the Company adopted the liability method of accounting
for income taxes. Under this method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting and the
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Prior to 1996, the Company qualified as an S-Corporation and any income taxes
were the responsibilities of the shareholders.
F-14
<PAGE> 74
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
--------- -----------
<S> <C> <C>
Statutory rate at 34%, applied to pre-tax loss........... $(384,000) $(1,332,000)
State income taxes, net of federal tax benefit........... (45,000) (157,000)
Research and development tax credit...................... (28,000) (159,000)
Foreign operations....................................... 100,000 --
Other.................................................... 46,000 (26,000)
Change in valuation allowance............................ 311,000 1,674,000
--------- -----------
$ -- $ --
========= ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
Depreciation............................................... $ -- $ 69,000
Accrued liabilities........................................ 20,000 148,000
Allowance for doubtful accounts............................ 30,000 97,000
Net operating loss carryforwards........................... 233,000 1,484,000
Research and development tax credit carryforwards.......... 28,000 187,000
--------- -----------
311,000 1,985,000
Less valuation allowance................................... (311,000) (1,985,000)
--------- -----------
Net deferred income tax assets............................. $ -- $ --
========= ===========
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized
to reduce the net deferred income tax assets to zero. The Company has not
recognized any benefit from the future use of such loss carryforwards because
management's evaluation of all the available evidence in assessing the
realizability of the tax benefits of such loss carryforwards indicates that the
underlying assumptions of future profitable operations contain risks that do not
provide sufficient assurance to recognize such tax benefits currently.
The Company has approximately $3,906,000 of net operating loss
carryforwards for federal income tax purposes that expire in varying amounts
between 2011 and 2012. A small portion of the net operating loss carryforwards
may be subject to certain limitations in the event of a change in ownership. The
Company also has approximately $295,000 of net operating loss carryforwards
related to its foreign operations which have no expiration date. Additionally,
the Company has approximately $187,000 of research and development tax credit
carryforwards which expire between 2011 and 2012.
9. EMPLOYEE BENEFIT PLANS
In January 1996, the Company established a 401(k) plan that covers
substantially all employees over 21 years of age. The Company may make
contributions to the plan at its discretion. The Company made no contributions
to the plan for the years ended December 31, 1996 or 1997.
F-15
<PAGE> 75
ISS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LOSS PER SHARE
The following table sets forth the computation of basic, diluted and
unaudited pro forma net loss per share:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------------------- ------------
1995 1996 1997 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net loss................... $ (140,000) $(1,131,000) $ (3,919,000) $ (3,919,000)
Accretion of Series A and
Series B Redeemable,
Convertible Preferred
Stock................... -- (7,000) (11,000) (11,000)
----------- ----------- ------------ ------------
$ (140,000) $(1,138,000) $ (3,930,000) $ (3,930,000)
=========== =========== ============ ============
Denominator:
Denominator for basic loss
per share -- weighted
average shares.......... 5,001,000 7,916,000 7,908,000 7,908,000
Cheap stock................ 2,096,000 2,096,000 2,096,000 536,000
Redeemable, Convertible
Preferred Stock......... -- -- -- 5,737,000
----------- ----------- ------------ ------------
7,097,000 10,012,000 10,004,000 14,181,000
=========== =========== ============ ============
Basic loss per share......... $ (.02) $ (.11) $ (.39)
=========== =========== ============
Diluted loss per share....... $ (.02) $ (.11) $ (.39)
=========== =========== ============
Pro forma loss per share
(unaudited)................ $ (.28)
============
</TABLE>
See Note 1 for a discussion of the statement of operations presentation of
only unaudited pro forma net loss per share.
11. EXPORT SALES
Export sales from the United States to the Europe and Asia/Pacific regions
represented approximately 10% and 3%, respectively, of total revenues for the
year ended December 31, 1997. Export sales were not significant for the years
ended December 31, 1995 and 1996. Revenues generated from the Company's foreign
operations located in the Asia/Pacific region totalled approximately 8% of total
revenues for the year ended December 31, 1997. The Company had no revenue
generating foreign operations prior to 1997.
F-16
<PAGE> 76
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom Goldman, Sachs
& Co., BancAmerica Robertson Stephens, UBS Securities LLC and Wessels, Arnold &
Henderson, L.L.C. are acting as representatives, has severally agreed to
purchase from the Company and the Selling Stockholders, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co. .......................................
BancAmerica Robertson Stephens .............................
UBS Securities LLC..........................................
Wessels, Arnold & Henderson, L.L.C. ........................
---------
Total............................................. 2,500,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company and Selling Stockholders have granted the Underwriters an
option exercisable for 30 days after the date of the Prospectus to purchase up
to an aggregate of 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
2,500,000 shares of Common Stock offered.
The Company and the Selling Stockholders have agreed that, during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any securities of the
Company (other than pursuant to employee stock option plans existing on the date
of this Prospectus) which are substantially similar to the shares of Common
Stock or which are convertible or exchangeable into shares of Common Stock or
any securities which are substantially similar to the shares of Common Stock,
without the prior written consent of the representatives of the Underwriters.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriters in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions created by the Underwriters involve the sale by the Underwriters
of a greater number of shares of Common Stock than they are required to purchase
from the Company in the Offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the Offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize,
U-1
<PAGE> 77
maintain or otherwise affect the market price of the Common Stock which may be
higher than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares of
Common Stock offered by them.
Prior to this Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company and the representatives of the Underwriters. Among the factors to be
considered in determining the initial public offering price of the Common Stock,
in addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
The Underwriters have reserved for sale, at the initial public offering
price up to percent of the shares of Common Stock offered hereby for
employees of the Company and certain other individuals who have expressed an
interest in purchasing such shares of Common Stock in this Offering. The number
of shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same basis as
other shares offered hereby.
Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "ISSX". The Company has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
U-2
<PAGE> 78
============================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 16
Dividend Policy............................ 16
Dilution................................... 17
Capitalization............................. 18
Selected Consolidated Financial Data....... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 20
Business................................... 26
Management................................. 41
Certain Transactions....................... 49
Principal and Selling Stockholders......... 50
Description of Capital Stock............... 52
Shares Eligible for Future Sale............ 56
Validity of Common Stock................... 58
Experts.................................... 58
Additional Information..................... 58
Index to Consolidated Financial
Statements............................... F-1
Underwriting............................... U-1
</TABLE>
------------------
THROUGH , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
============================================================
============================================================
2,500,000 SHARES
ISS GROUP, INC.
COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
----------------------
[INTERNET SECURITY SYSTEMS LOGO]
----------------------
GOLDMAN, SACHS & CO.
BANCAMERICA ROBERTSON STEPHENS
UBS SECURITIES
WESSELS, ARNOLD & HENDERSON
REPRESENTATIVES OF THE UNDERWRITERS
============================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meaning assigned to them in the Prospectus which forms
a part of this Registration Statement.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant connection
with the sale of Common Stock being registered. All amounts are estimates,
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 9,330
NASD fee.................................................... 3,663
Nasdaq National Market listing fee.......................... 50,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 175,000
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... 5,000
Miscellaneous............................................... 52,007
--------
Total............................................. $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
such action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in
II-1
<PAGE> 80
connection therewith; that the indemnification provided for by Section 145 shall
not be deemed exclusive of any other rights which the indemnified party may be
entitled; that indemnification provided by Section 145 shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
Section 102(b)(7) of the General Corporation Law or the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of the
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article Eleventh of the Registrant's Charter provides that, to the fullest
extent permitted by the Delaware General Corporation Law as the same exists or
as it may hereafter be amended, no director of the Registrant shall be
personally liable to the Registrant or its stockholders for monetary damages for
breach of fiduciary duty as a director.
Section 6.1 of the Registrant's Bylaws further provides that the Registrant
shall, to the maximum extent and in the manner permitted by the General
Corporation Law of Delaware, indemnify each of its directors and officers
against expenses (including attorneys' fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the registrant.
Prior to the consummation of this offering, the Company will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.
The Registrant maintains $ of officers' and directors' liability
insurance.
Reference is made to Section of the Underwriting Agreement filed as
Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the Registrant has sold the following
securities or engaged in the following transactions which were not registered
under the Securities Act of 1933:
(1) On September 6, 1995, Internet Security Systems, Inc. ("Oldco")
sold 1,293,475 shares of its Common Stock, par value $1.00 per share
("Oldco Common Stock") to Kevin J. O'Connor for $50,000.
(2) On December 29, 1995, Oldco issued 1,959,770 shares of Oldco
Common Stock to Thomas E. Noonan and 162,890 shares of Oldco Common Stock
to Glenn McGonnigle in consideration for their employment with Oldco.
(3) On February 2 and 21, 1996, Oldco sold an aggregate of 3,650,000
shares of its Series A Preferred Stock, par value $1.00 per share, for an
aggregate of $3,650,000 to Greylock Equity Limited Partnership, Sigma
Associates III, L.P., Sigma Investors III, L.P., Sigma Partners III, L.P.
and John P. Imlay, Jr. Also in connection with the sale of Oldco's Series A
Preferred Stock, Oldco repurchased 100,000 shares of Oldco Common Stock
from Christopher W. Klaus for $15,000.
II-2
<PAGE> 81
(4) On February 14, 1997 the Oldco sold an aggregate of 2,086,957
shares of its Series B Preferred Stock, par value $1.00 per share, for an
aggregate of $5,280,001.20 to Greylock Equity Limited Partnership, Sigma
Associates III, L.P., Sigma Investors III, L.P., Sigma Partners III, L.P.,
John P. Imlay, Jr., Kleiner Perkins Caufield & Byers VIII, KPCB Information
Sciences Zaibatsu Fund II, KPCB Java Fund, AT&T Venture Fund II, L.P. and
Venture Fund I, L.P.
(5) In December 1997, the Registrant, Oldco and the shareholders of
Oldco entered into an exchange agreement whereby (i) each share of Oldco
Common Stock was exchanged for one share of the Company's Common Stock,
(ii) each share of Oldco's Series A Preferred Stock was exchanged for one
share of the Company's Series A Preferred Stock and (iii) each share of
Oldco's Series B Preferred Stock was exchanged for one share of the
Company's Series B Preferred Stock.
(6) The Company has from time to time granted stock options to
employees. The following table sets forth certain information regarding
such grants:
<TABLE>
<CAPTION>
NUMBER RANGE OF
OF SHARES EXERCISE PRICES
--------- ---------------
<S> <C> <C>
April 19, 1994 (inception) through December 31,
1995............................................ -- $ --
January 1, 1996 through December 31, 1996......... 810,350 0.15-0.60
January 1, 1997 through December 31, 1997......... 1,020,500 0.60-7.00
</TABLE>
The above securities were offered and sold by the Registrant in reliance
upon exemptions for registration pursuant to either (i) Section 4(2) of the
Securities Act, as transactions not involving any public offering, or (ii) Rule
701 under the Securities Act. No underwriters were involved in connections with
the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<S> <C> <S>
1.1* -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation.
3.2 -- Bylaws.
4.1* -- Specimen Common Stock certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions of the Certificate
of Incorporation and Bylaws of the Registrant defining the
rights of holders of Common Stock of the Registrant.
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP.
10.1 -- Restated 1995 Stock Incentive Plan.
10.2 -- Directed Shares Agreements.
10.3 -- Internet Security Systems, Inc. Amended and Restated Rights
Agreement.
10.4* -- Stock Exchange Agreement dated December 9, 1997.
10.5 -- [Reserved]
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Ernst & Young LLP.
</TABLE>
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<PAGE> 82
23.2* -- Consent of Brobeck, Phleger & Harrison LLP (included in the
opinion filed as Exhibit 5.1).
24.1 -- Power of attorney pursuant to which amendments to this
registration statement may be filed (included on the
signature page in Part II hereof).
27.1 -- Financial Data Schedule (for SEC use only).
- ---------------
* To be filed by amendment
(b) Financial Statement Schedules
The following financial statement schedule of the Company is included in
Part II of the Registration Statement:
Report of Ernst & Young LLP, Independent Auditors
Schedule II -- Valuation and Qualifying Accounts
Except for the financial statement schedule listed above, the financial
statement schedules for which provision is made in the applicable accounting
regulations of the Commission are either not required under the related
instructions or are inapplicable and have therefore been omitted.
ITEM 17. UNDERTAKINGS
The registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Charter or the
Bylaws of the registrant, the Underwriting Agreement, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA,
STATE OF GEORGIA, ON THIS 20TH DAY OF JANUARY, 1998.
ISS GROUP, INC.
By: /s/ THOMAS E. NOONAN
------------------------------------
Thomas E. Noonan
President, Chief Executive Officer
and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Thomas E. Noonan, Richard Macchia and Jon
Ver Steeg and each of them, his true and lawful attorney-in-fact and agents,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ THOMAS E. NOONAN Chairman, President and January 20, 1998
- ----------------------------------------------------- Chief Executive
Thomas E. Noonan (Principal Executive
Officer)
/s/ CHRISTOPHER W. KLAUS Chief Technical Officer, January 20, 1998
- ----------------------------------------------------- Secretary and Director
Christopher W. Klaus
/s/ RICHARD MACCHIA Vice President and Chief January 20, 1998
- ----------------------------------------------------- Financial Officer
Richard Macchia (Principal Financial and
Accounting Officer)
/s/ RICHARD S. BODMAN Director January 20, 1998
- -----------------------------------------------------
Richard S. Bodman
/s/ ROBERT E. DAVOLI Director January 20, 1998
- -----------------------------------------------------
Robert E. Davoli
</TABLE>
II-5
<PAGE> 84
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ KEVIN J. O'CONNOR Director January 20, 1998
- -----------------------------------------------------
Kevin J. O'Connor
/s/ DAVID N. STROHM Director January 20, 1998
- -----------------------------------------------------
David N. Strohm
</TABLE>
II-6
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of ISS Group, Inc. as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated January 13,
1998 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
January 13, 1998
S-1
<PAGE> 86
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF YEAR PROVISION WRITEOFFS END OF YEAR
----------------- --------- --------- -----------
<S> <C> <C> <C> <C>
1995
Allowance for Doubtful Accounts........ $ -- $ -- $ -- $ --
======= ======== ======== ========
1996
Allowance for Doubtful Accounts........ $ -- $ 86,000 $ (7,000) $ 79,000
======= ======== ======== ========
1997
Allowance for Doubtful Accounts........ $79,000 $195,000 $(19,000) $255,000
======= ======== ======== ========
</TABLE>
S-2
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
ISS GROUP, INC.
ARTICLE I.
The name of this Corporation shall be ISS Group, Inc.
ARTICLE II.
The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent at that address is The
Corporation Trust Company.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV.
The name and mailing address of the incorporator of the Corporation
is:
Brad Eastman
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, Texas 78701
ARTICLE V.
A. Authorized Shares. The aggregate number of shares that the
Corporation shall have authority to issue is 70,000,000, (i) 50,000,000 shares
of which shall be Common Stock, with a par value of $0.001 per share, and (ii)
20,000,000 shares of which shall be Preferred Stock, with a par value of $0.001
per share.
B. Common Stock. Each share of Common Stock shall have one vote
on each matter submitted to a vote of the stockholders of the Corporation.
Subject to the provisions of applicable law and the rights of the holders of
the outstanding shares of Preferred Stock, if any, the holders of shares of
Common Stock shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of the assets of the Corporation legally
available therefor, dividends or other distributions, whether payable in cash,
property or securities of the
<PAGE> 2
Corporation. The holders of shares of Common Stock shall be entitled to
receive, in proportion to the number of shares of Common Stock held, the net
assets of the Corporation upon dissolution after any preferential amounts
required to be paid or distributed to holders of outstanding shares of
Preferred Stock, if any, are so paid or distributed.
C. Preferred Stock. The Preferred Stock may be issued from time
to time by the Board of Directors as shares of one or more series. The first
series shall consist of 3,650,000 shares and is designated "Series A Preferred
Stock" with such rights, preferences, qualifications, limitations and
restrictions as set forth in subsection 1 hereof. The second series shall
consist of 2,086,957 shares and is designated "Series B Preferred Stock" with
such rights, preferences, qualifications, limitations and restrictions as set
forth in subsection 1 hereof. The description of shares of each additional
series of Preferred Stock, including any designations, preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors.
Subject to the designation rights, preferences,
qualifications, limitations and restrictions of the Series A Preferred Stock
and Series B Preferred Stock set forth in subsection 1 hereof, the Board of
Directors is expressly authorized, at any time, by adopting resolutions
providing for the issuance of, or providing for a change in the number of,
shares of any particular series of Preferred Stock and, if and to the extent
from time to time required by law, by filing certificates of amendment or
designation which are effective without stockholder action, to increase or
decrease the number of shares included in each series of Preferred Stock, but
not below the number of shares then issued, and to set in any one or more
respects the designations, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption relating to the shares of each such series. The
authority of the Board of Directors with respect to each series of Preferred
Stock shall include, but not be limited to, setting or changing the following:
a. the dividend rate, if any, on shares of such
series, the times of payment and the date
from which dividends shall be accumulated, if
dividends are to be cumulative;
b. whether the shares of such series shall be
redeemable and, if so, the redemption price
and the terms and conditions of such
redemption;
c. the obligation, if any, of the Corporation to
redeem shares of such series pursuant to a
sinking fund;
d. whether shares of such series shall be
convertible into, or exchangeable for, shares
of stock of any other class of classes and,
if so, the terms and conditions of such
conversion or exchange, including the price
or prices or the rate or rates of conversion
or exchange and the terms of adjustment, if
any;
2
<PAGE> 3
e. whether the shares of such series shall have
voting rights, in addition to the voting
rights provided by law, and, if so, the
extent of such voting rights;
f. the rights of the shares of such series in
the event of voluntary or involuntary
liquidation, dissolution or winding-up of the
Corporation; and
g. any other relative rights, powers,
preferences, qualifications, limitations or
restrictions thereof relating to such series.
1. SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK.
The rights, preferences, qualifications, limitations and restrictions of the
Series A Preferred Stock and Series B Preferred Stock are as follows:
a. Dividend Rights.
The holders of the Series A Preferred Stock and
Series B Preferred Stock shall be entitled only to such
dividends as shall be specifically declared by the Board of
Directors of the Corporation with respect to the Series A
Preferred Stock and Series B Preferred Stock out of funds
legally available therefor. Any such dividend so declared
shall be in preference to payment of any dividend (other than
dividends payable solely in Common Stock of the Corporation)
with respect to the Common Stock. Dividends, if declared and
paid, must be paid on, or, if declared and set apart for
payment on, must be declared and set apart for payment on, all
outstanding series of Preferred Stock contemporaneously, and
if less than full dividends are paid on or declared and set
apart for payment on all outstanding series, then the same
percentage of the respective dividend rate on each outstanding
series of Preferred Stock shall be paid on or declared and set
apart. No dividend or distribution shall be declared or paid
on any shares of Common Stock (other than dividends payable
solely in Common Stock of the Corporation) unless at the same
time an equivalent dividend or distribution is paid or
declared and set aside for payment on the Preferred Stock (on
an as if converted to Common Stock basis).
b. Liquidation Rights.
(1) In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or not,
the holders of Series A Preferred Stock and Series B Preferred
Stock shall be entitled to receive, before any amount shall be
paid to holders of Common Stock, an amount per share equal to
$1.00 (the "Series A Original Issue Price") and $2.53 (the
"Series B Original Issue Price"), respectively, as equitably
adjusted for stock splits, combinations or similar events
plus, in each case, all declared and unpaid dividends, if any
(such amount being herein referred to as the "Preference").
If, upon the occurrence of a liquidation,
3
<PAGE> 4
dissolution or winding up, the assets and surplus funds
distributed among the holders of all series of Preferred Stock
shall be insufficient to permit the payment to such holders of
the full amount of the Preference, then the entire assets and
surplus funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of
all series of Preferred Stock based upon the aggregate Original
Issue Price of all shares of Preferred Stock held by each
holder. If, upon the occurrence of a liquidation, dissolution
or winding up, after the payment to the holders of all series
of Preferred Stock of the full amount of the Preference, assets
or surplus funds remain in the Corporation, all such remaining
assets and surplus funds shall be distributed ratably among the
holders of the Common Stock, the Series A Preferred Stock and
the Series B Preferred Stock on an as-converted basis.
Notwithstanding anything to the contrary in this subsection
1(b), in no event shall the holders of the Series A Preferred
Stock and Series B Preferred Stock be entitled to receive more
than $2.00 and $5.06 per share, respectively, unless such
holders have converted their shares of Series A Preferred Stock
or Series B Preferred Stock into Common Stock prior to the
occurrence of a liquidation, dissolution or winding up of the
Corporation and the amount to be distributed to the holders of
Common Stock of the Corporation upon the occurrence of such
event, after paying the preferences of the holder of the Series
A Preferred Stock and Series B Preferred Stock, exceeds such
amount
(2) For purposes of subsection 1(b)(1), a
liquidation, dissolution or winding up of the Corporation
shall be deemed to be occasioned by, and to include, the
Corporation's sale of all or substantially all of its assets
or the acquisition of this Corporation by another entity by
means of merger (other than a merger which solely effects a
change of domicile) or consolidation, where, after such merger
or consolidation, less than fifty percent (50%) of the
surviving entity is held by persons who were stockholders of
the Corporation immediately before the merger or
consolidation.
c. Redemption.
(1) Mandatory Redemption of Preferred Stock.
Subject to the terms and conditions of this subsection 1(c),
to the extent that any outstanding shares of the Series A
Preferred Stock or Series B Preferred Stock have not been
redeemed or converted into Common Stock prior to September 30,
2000, the Corporation shall upon receiving at any time
thereafter and at least 90 days before the first Redemption
Date (as defined below), a written request by the holders of
at least fifty-one percent (51%) of the then outstanding
shares of Series A Preferred Stock and Series B Preferred
Stock voting together as one class (the "Election"), for the
redemption of all the Series A Preferred Stock and Series B
Preferred Stock under this subsection 1(c)(1), redeem on
January 31, 2001, January 31, 2002 and January 31, 2003 (each
a "Redemption Date"), a number of shares of Series A Preferred
Stock and Series B Preferred Stock equal to one-third,
one-half and all, respectively, of the then remaining
outstanding shares
4
<PAGE> 5
of Series A Preferred Stock and Series B Preferred Stock. Such
shares are to be redeemed from any source of funds legally
available therefor at the redemption price therefor described
in this subsection. The redemption price for each share of
Series A Preferred Stock shall be an amount equal to the Series
A Original Issue Price plus the amount of all declared and
unpaid dividends thereon (if any). The redemption price for
each share of Series B Preferred Stock shall be an amount equal
to the Series B Original Issue Price plus the amount of all
declared and unpaid dividends thereon (if any). If upon any
Redemption Date scheduled under this subsection for the
redemption of Series A Preferred Stock or Series B Preferred
Stock, the funds and assets of the Corporation legally
available to redeem such stock shall be insufficient to redeem
all shares of Series A Preferred Stock and Series B Preferred
Stock then scheduled to be redeemed, then any such unredeemed
shares shall be carried forward and shall be redeemed (together
with any other shares of Preferred Stock then scheduled to be
redeemed) at the next such scheduled Redemption Date to the
full extent of legally available funds of the Corporation at
such time, and any such unredeemed shares shall continue to be
so carried forward until redeemed. Shares of Series A Preferred
Stock and Series B Preferred Stock which are subject to
redemption but which have not been redeemed due to insufficient
legally available funds and assets of the Corporation shall
continue to be outstanding and entitled to all dividends
declared on such Preferred Stock (if any), liquidation,
conversion and other rights, preferences, privileges and
restrictions of such Preferred Stock until such shares have
been converted or redeemed.
(2) Partial Redemption. No redemption shall be
made under this subsection 1(c) of only a part of the then
outstanding Preferred Stock unless the Corporation shall
effect such redemption pro rata among all holders of then
outstanding Series A Preferred Stock and Series B Preferred
Stock, based upon the aggregate redemption price of all shares
of Preferred Stock held by each holder thereof on the
applicable Redemption Date.
(3) Redemption Notice. At least twenty (20) but
no more than sixty (60) days prior to any Redemption Date,
written notice shall be mailed by the Corporation, postage
prepaid, to each holder of record (at the close of business on
the business day next preceding the day which notice is given)
of the Preferred Stock to be redeemed, at the address last
shown on the records of the Corporation for such holder or
given by the holder to the Corporation for the purpose of
notice or, if no such address appears or is given, at the
place where the principal executive office of the Corporation
is located, notifying such holder of the redemption to be
effected, specifying the subsection hereof under which such
redemption is being effected, the Redemption Date, the
applicable redemption price, the number of such holder's
shares of Series A Preferred Stock and Series B Preferred
Stock to be redeemed, the place at which payment may be
obtained and the date on which such holder's conversion rights
(as set forth in subsection 1(f)) as to such shares terminate
(which date shall in no event be earlier than the
5
<PAGE> 6
business day prior to the Redemption Date) and calling upon
such holder to surrender to the Corporation, in the manner and
at the place designated, the certificate or certificates
representing the shares to be redeemed (the "Redemption
Notice").
(4) Surrender of Certificates. On or before each
designated Redemption Date, each holder of Preferred Stock to
be redeemed shall (unless such holder has previously exercised
his right to convert such shares of Preferred Stock into
Common Stock as provided in subsection 1(f) below), surrender
the certificate(s) representing such shares of Preferred Stock
to be redeemed to the Corporation, in the manner and at the
place designated in the Redemption Notice, and thereupon the
applicable redemption price for such shares shall be payable
to the order of the person whose name appears on such
certificate(s) as the owner thereof, and each surrendered
certificate shall be canceled and retired. If less than all of
the shares represented by such certificate are redeemed, then
the Corporation shall promptly issue a new certificate
representing the unredeemed shares.
(5) Effect of Redemption. If the Redemption
Notice shall have been duly given, and if on the Redemption
Date the applicable redemption price is either paid or made
available for payment through the deposit arrangements
specified in subsection 6 below, then notwithstanding that the
certificates evidencing any of the shares of Preferred Stock
so called for redemption shall not have been surrendered, such
shares shall not thereafter be transferred on the
Corporation's books and all of the rights of the holders of
such shares with respect to such shares shall terminate after
the Redemption Date, except only the right of the holders to
receive the applicable redemption price without interest upon
surrender of their certificate(s) therefor.
(6) Deposit of Redemption Price. On or prior to
a Redemption Date, the Corporation may, at its option, deposit
with a bank or trust company having a capital and surplus of
at least $100,000,000, as a trust fund, a sum equal to the
aggregate applicable redemption price for all shares of Series
A Preferred Stock and Series B Preferred Stock to be redeemed
on such Redemption Date but not yet redeemed, with irrevocable
instructions and authority to the bank or trust company to
pay, on or after the Redemption Date, the applicable
redemption price to the respective holders of all shares of
Series A Preferred Stock and Series B Preferred Stock called
for redemption on that Redemption Date upon the surrender of
their share certificate. From and after the date of such
deposit, the shares so called for redemption shall be
redeemed. The deposit shall constitute full payment for the
shares to their holders, and from and after the date of the
deposit, the shares shall be deemed to be no longer
outstanding, and the holders thereof shall cease to be
stockholders with respect to such shares and shall have no
rights with respect thereto except the right to receive from
the bank or trust company payment of the redemption price of
the shares, without interest, upon
6
<PAGE> 7
surrender of their certificates therefor,and the right to
convert such shares as provided in subsection 1(f) below. Any
funds so deposited and unclaimed at the end of one (1) year
after such Redemption Date shall be released or repaid to the
Corporation, after which time the holders of shares called for
redemption who have not claimed such funds shall be entitled to
receive payment of the redemption price only from the
Corporation.
d. Voting Rights.
(1) Voting Other than for Directors. The holder
of each share of Series A Preferred Stock and Series B
Preferred Stock shall be entitled to the number of votes equal
to the number of full shares of Common Stock into which such
holder's shares of Series A Preferred Stock and Series B
Preferred Stock could be converted on the record date for the
vote or written consent of stockholders and, except as
otherwise required by law, shall have voting rights and powers
equal to the voting rights and powers of the Common Stock. The
holder of each share of Series A Preferred Stock and Series B
Preferred Stock shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of the
corporation and shall vote together with (and not as a
separate class from) holders of the Common Stock upon all
other matters submitted to a vote of stockholders, except
those matters required pursuant to subsection 1(e) or by law
to be submitted to a class or series vote. Fractional votes
shall not, however, be permitted and any fractional voting
rights resulting from the above formula (after aggregating all
shares of Common Stock into which shares of Preferred Stock
held by each holder could be converted) shall be rounded to
the nearest whole number (with one-half rounded upward to
one).
(2) Voting for Directors. Prior to a Public
Offering (as defined in Article X) the holders of the Series A
Preferred Stock, voting as a separate series, shall elect two
(2) members of the Corporation's Board of Directors and the
holders of Common Stock, Series A Preferred Stock and Series B
Preferred Stock, voting together as a class, shall elect all
the remaining directors. In the case of any vacancy in the
office of a director elected by a specific group of
stockholders, a successor shall be elected to hold office for
the unexpired term of such director by the affirmative vote of
a majority of the shares of such specified group given at a
special meeting of such stockholders duly called or by an
action by written consent for that purpose. Subject to the
requirements of applicable law any director who shall have
been elected by a specified group of stockholders may be
removed during the aforesaid term of office, either for or
without cause, by, and only by, the affirmative vote of the
holders of a majority of the shares of such specified group,
given at a special meeting of such stockholders duly called or
by an action by written consent for that purpose and any such
vacancy thereby created may be filled by the vote of the
holders of a majority of the shares of such specified group
represented at such meeting or in such consent.
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<PAGE> 8
e. Protective Provisions. In addition to any
other class vote that may be required by law, so long as the number of
shares of Series A Preferred Stock and Series B Preferred Stock
outstanding equals or exceeds thirty percent (30%) of the number of
shares of Series A Preferred Stock and Series B Preferred Stock
authorized hereby, the Corporation shall not, without first obtaining
the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of the
Series A Preferred Stock and Series B Preferred Stock voting together
as a single class:
(1) sell, convey or otherwise dispose of all or
substantially all of its property or business, or merge into
or effect a reorganization with any other corporation (other
than a wholly owned subsidiary corporation) in which the
stockholders of this corporation immediately prior to the
transaction possess less than 50% of the voting power of the
surviving entity (or its parent) immediately after the
transaction (any and all of the foregoing being herein
referred to as an "Acquisition Transaction"). Notwithstanding
the foregoing, in the event that an Acquisition Transaction is
proposed, such Acquisition Transaction shall first be
submitted to the vote of the holders of the Common Stock, the
Series A Preferred Stock and the Series B Preferred Stock
voting together as a single class in the manner described in
subsection 1(d)(1) above. If holders of 75% of the outstanding
voting equity securities (with the vote of the holders of the
Series A Preferred Stock and the Series B Preferred Stock
determined on an as converted basis) vote to approve such
Acquisition Transaction, the Series A Preferred Stock and the
Series B Preferred Stock shall not be entitled to a separate
class vote with respect to such Acquisition Transaction and
such Acquisition Transaction shall be approved;
(2) change the rights, preferences, privileges or
restrictions of the Series A Preferred Stock or Series B
Preferred Stock;
(3) declare any dividends;
(4) create or authorize a new class or series of
securities having rights, preferences or privileges on parity
with or senior to the Series A Preferred Stock or Series B
Preferred Stock; or
(5) amend or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation
or by-laws if such action would alter or change the
preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of the Series A
Preferred Stock or Series B Preferred Stock.
f. Conversion. The holders of the Series A
Preferred Stock and Series B Preferred Stock have conversion rights as
follows (the "Conversion Rights"):
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<PAGE> 9
(1) Right to Convert. Each share of Series A
Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent
for the Series A Preferred Stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined
by dividing the Series A Original Issue Price by the Series A
Conversion Price, determined as hereinafter provided, in
effect at the time of the conversion. The Series A Conversion
Price shall initially be one dollar ($1.00). Such initial
Series A Conversion Price shall be subject to adjustment as
hereinafter provided. Upon conversion of a share of Series A
Preferred Stock, all declared and unpaid dividends on such
share of Series A Preferred Stock shall be paid, to the extent
funds are legally available therefor, either in cash or in
shares of Common Stock of the Corporation, at the election of
the Corporation, wherein the shares of Common Stock shall be
valued at the fair market value at the time of such
conversion, as determined in good faith by the Board of
Directors of the Corporation. Each share of Series B
Preferred Stock shall be convertible, at the option of the
holder thereof, at any time after the date of issuance of such
share at the office of the Corporation or any transfer agent
for the Series B Preferred Stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined
by dividing the Series B Original Issue Price by the Series B
Conversion Price, determined as hereinafter provided, in
effect at the time of the conversion. The Series B Conversion
Price shall initially be two dollars and 53/100 cents ($2.53).
Such initial Series B Conversion Price shall be subject to
adjustment as hereinafter provided. Upon conversion of a
share of Series B Preferred Stock, all declared and unpaid
dividends on such share of Series B Preferred Stock shall be
paid, to the extent funds are legally available therefor,
either in cash or shares of Common Stock of the Corporation,
at the election of the Corporation, wherein the shares of
Common Stock shall be valued at the fair market value at the
time of such conversion, as determined in good faith by the
Board of Directors of the Corporation.
(2) Automatic Conversion. Each share of Series
A Preferred Stock and Series B Preferred Stock shall
automatically be converted into shares of Common Stock at the
then effective Series A Conversion Price or Series B
Conversion Price, respectively, upon: (i) the closing of a
firm underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of shares of the
Corporation's Common Stock at a price per share of Common
Stock, prior to underwriter commissions and offering expenses,
of not less than $6.00 per share (appropriately adjusted for
any stock split, dividend, combination, recapitalization or
the like) and an aggregate offering price (before deduction of
underwriter commissions and offering expenses) of not less
than $10,000,000; or, (ii) the written election of holders of
not less than a majority of the then outstanding shares of
such series (collectively, an "Event of Conversion"). In the
event of the automatic conversion of the Preferred Stock upon
a public offering as aforesaid,
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<PAGE> 10
the person(s) entitled to receive the Common Stock issuable
upon such conversion of Preferred Stock shall not be deemed to
have converted such Preferred Stock until immediately prior to
the closing of such sale of securities.
(3) Mechanics of Conversion. No fractional
shares of Common Stock shall be issued upon conversion of
Preferred Stock. In lieu of any fractional shares to which
the holder would otherwise be entitled (after aggregating all
shares of Preferred Stock held by such holder such that the
maximum number of whole shares of Common Stock is issued to
such holder upon conversion), the Corporation shall pay cash
equal to such fraction multiplied by the then effective
Conversion Price. Before any holder of Series A Preferred
Stock or Series B Preferred Stock shall be entitled to convert
the same into full shares of Common Stock and to receive
certificates therefor, such holder shall surrender the
certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the
Series A Preferred Stock or Series B Preferred Stock, and
shall give written notice to the Corporation at such office
that such holder elects to convert the same; provided,
however, that in the event of an automatic conversion pursuant
to subsection 1(f)(2) hereof, the outstanding shares of Series
A Preferred Stock or Series B Preferred Stock shall be
converted automatically without any further action by the
holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or
its transfer agent, and provided further that the Corporation
shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Series A
Preferred Stock or Series B Preferred Stock are either
delivered to the Corporation or its transfer agent as provided
above, or the holder notifies the Corporation or its transfer
agent that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates.
The Corporation shall, as soon as practicable after
such delivery, or after such agreement and indemnification,
issue and deliver at such office to such holder, a certificate
or certificates for the number of shares of Common Stock to
which such holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts
payable as the result of a conversion into fractional shares
of Common Stock. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of
such surrender of the shares of Series A Preferred Stock or
Series B Preferred Stock to be converted, or, in the case of
automatic conversion, on the date of written election to
convert or on the date of and immediately prior to the closing
of the offering, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
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(4) Adjustments of Conversion Price for Diluting
Issues.
(a) Adjustments for Dilutive Issuances.
(i) Special Definitions. For purposes
of this Section f(4), the following definitions shall
apply:
A. "Options" shall mean rights, options
or warrants to subscribe for, purchase or otherwise either Common Stock or
Convertible Securities.
B. "Original Issue Date" shall mean the
date on which the first share of Series B Preferred Stock was first issued.
C. "Convertible Securities" shall mean
any evidences of indebtedness, shares or other securities convertible into or
exchangeable for Common Stock.
D. "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section
f(4)(a)(iii) deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(1) upon conversion of the Series A
Preferred Stock or Series B Preferred Stock;
(2) to officers, directors and
employees of, consultants to, and dealers, distributors or resellers for, the
Corporation pursuant to an option plan, purchase plan or other employee or
consultant incentive plan, pursuant to stock grants or any other plan or
arrangement approved by the Board of Directors;
(3) as a dividend or distribution on
Series A Preferred Stock or Series B Preferred Stock or pursuant to any event
for which adjustment is made pursuant to subsection 1(f)(4)(b),(c) or (d)
hereof; or
(4) to persons or entities with whom
the Corporation has business relationships, including under equipment leasing
arrangements, bank or other institutional loans, acquisitions of companies or
product lines or other arrangements or transactions wherein the principal
purpose of the issuance of such shares (or warrants or options) is for
non-equity financing purposes; provided, that such arrangements are approved
by the majority vote or written consent of the Board of Directors of the
Corporation.
E. "Issue Price" with respect to any
issuance of Additional Shares of Common Stock shall mean the price per share
obtained by dividing the total consideration received by the Corporation in
respect of such Additional Shares of Common Stock, computed in accordance with
subsection 1(f)(4)(a)(v) hereof by the aggregate number of
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<PAGE> 12
shares of such Additional Shares of Common Stock issued, computed in accordance
with subsection 1(f)(4)(a)(iii) hereof.
(ii) No Adjustment of Conversion Price.
No adjustment in the Conversion Price for any
series of Preferred Stock shall be made
hereunder in respect of the issuance of
Additional Shares of Common Stock unless the
consideration per share for an Additional
Share of Common Stock issued or deemed to be
issued by the Corporation is less than the
Conversion Price for such series of Preferred
Stock in effect on the date of, and
immediately prior to, such issue.
(iii) Deemed Issue of Additional Shares
of Common Stock.
A. Options and Convertible Securities.
Except as otherwise provided in subsection 1(f)(4)(a)(ii), in the event the
Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date
for the determination of holders of any class of securities entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue of Options or Convertible Securities or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to subsection 1(f)(4)(a)(v) hereof) of such Additional Shares of
Common Stock would be less than the Conversion Price in effect on the date of
and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(2) upon the expiration of any such
Options or any rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion Price computed
upon the original issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon
such expiration, be recomputed as if:
(aa) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
Stock issued were shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the
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<PAGE> 13
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration actually received by
the Corporation upon such exercise, or for the issue of all such Convertible
Securities which were actually converted or exchanged, plus the additional
consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(bb) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation upon the issue of the Convertible Securities with respect to which
such Options were actually exercised;
(3) no readjustment pursuant to clause (bb)
above shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original adjustment
date, or (ii) the Conversion Price that would have resulted from any issuance
of Additional Shares of Common Stock between the original adjustment date and
such readjustment date; and
(4) in the case of any Options which expire
by their terms not more than thirty (30) days after the date of issue thereof,
no adjustment of the Conversion Price shall be made until the expiration or
exercise of all such Options.
(iv) Adjustment of Conversion Price Upon
Issuance of Additional Shares of Common Stock. In
the event the Corporation shall after the Original
Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed
to be issued pursuant to subsection 1(f)(4)(a)(iii))
without consideration or for a consideration per
share less than the Conversion Price in effect on the
date of and immediately prior to such issue, then and
in such event such Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated
to the nearest cent) determined by multiplying such
Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate
consideration received by the Corporation for the
total number of Additional Shares of Common Stock so
issued would purchase at such Conversion Price, and
the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior
to such issue plus the number of such Additional
Shares of Common Stock so issued; and provided
further that, for the purposes of this subsection
1(f)(4)(a)(iv), all shares of Common Stock issuable
upon conversion of outstanding Convertible
Securities, including the Series A Preferred Stock
and Series B Preferred Stock, shall be deemed to be
outstanding, and immediately
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after any Additional Shares of Common Stock are deemed issued pursuant
to subsection 1(f)(4)(a)(iii), such Additional Shares of Common Stock
shall be deemed to be outstanding.
(v) Determination of Consideration. For
purposes of this subsection 1(f)(4), the
consideration received by the Corporation for
the issue of any Additional Shares of Common
Stock shall be computed as follows:
A. Cash and Property. Such
consideration shall:
(1) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(2) insofar as it consists of services
or property other than cash, be computed at the fair value thereof at the time
of such issue, as determined in good faith by the Board of Directors; and
(3) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(1) and (2) above and as determined in good faith by the Board of Directors.
B. Options and Convertible Securities.
The consideration per share received by the Corporation for Additional Shares
of Common Stock deemed to have been issued pursuant to subsection
1(f)(4)(a)(iii), relating to Options and Convertible Securities, shall be
determined by dividing
(1) the total amount, if any, received
or receivable by the Corporation as consideration for the issue of such Options
or Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise in full of such
Options or the conversion or exchange in full of such Convertible Securities,
or in the case of Options for Convertible Securities, the exercise in full of
such Options for Convertible Securities and the conversion or exchange in full
of such Convertible Securities, by
(2) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise in full of such Options or the conversion or
exchange in full of such Convertible Securities.
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(vi) No adjustment shall be made to the
Conversion Price pursuant to subsection 1(f)(iv)
unless such adjustment would require a decrease of
the Conversion Price of at least $.05 in such
Conversion Price; provided that any adjustments which
by reason of this subsection 1(f)(vi) are not
required to be made, shall be carried forward and
shall be made at the time of and together with the
next subsequent adjustment which, together with any
adjustment so carried forward, shall require a
decrease of at least $.05 in the Conversion Price
then in effect hereunder.
(b) Adjustments for Subdivisions,
Combinations or Consolidations of Common
Stock. In the event the outstanding shares
of Common Stock shall be subdivided (by stock
split, stock dividend or otherwise), into a
greater number of shares of Common Stock, the
Conversion Price for a series of Preferred
Stock then in effect shall, concurrently with
the effectiveness of such subdivision, be
proportionately decreased. In the event the
outstanding shares of Common Stock shall be
combined or consolidated, by reclassification
or otherwise, into a lesser number of shares
of Common Stock, the Conversion Price for a
series of Preferred Stock then in effect
shall, concurrently with the effectiveness of
such combination or consolidation, be
proportionately increased.
(c) Adjustments for Other Distributions.
In the event the Corporation at any time or
from time to time makes, or fixes a record
date for the determination of holders of
Common Stock entitled to receive, any
distribution payable in securities of the
Corporation other than shares of Common Stock
and other than as otherwise adjusted in this
subsection 1(f), (and provision is not made
for payment of such distribution to holders
of the Series A Preferred Stock and Series B
Preferred Stock on an as-converted basis)
then and in each such event provision shall
be made so that the holders of Series A
Preferred Stock and Series B Preferred Stock
shall receive upon conversion thereof, in
addition to the number of shares of Common
Stock receivable thereupon, the amount of
securities of the Corporation which they
would have received had their shares of
Series A Preferred Stock and Series B
Preferred Stock been converted into Common
Stock on the date of such event and had they
thereafter, during the period from the date
of such event to and including the date of
conversion, retained such securities
receivable by them as aforesaid during such
period, subject to all other adjustments
called for during such period under this
subsection 1(f) with respect to the rights of
the holders of the Series A Preferred Stock
and Series B Preferred Stock.
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(d) Adjustments for Reclassification.
Exchange and Substitution. If the Common
Stock issuable upon conversion of the Series
A Preferred Stock and Series B Preferred
Stock shall be changed into the same or a
different number of shares of any other class
or classes of stock, whether by capital
reorganization, reclassification or otherwise
(other than a subdivision, combination or
consolidation of shares provided for above),
the Conversion Price for such series of
Preferred Stock then in effect shall,
concurrently with the effectiveness of such
reorganization or reclassification, be
proportionately adjusted such that the Series
A Preferred Stock and Series B Preferred
Stock shall be convertible into, in lieu of
the number of shares of Common Stock which
the holders would otherwise have been
entitled to receive, a number of shares of
such other class or classes of stock
equivalent to the number of shares of Common
Stock that would have been subject to receipt
by the holders upon conversion of such shares
of Series A Preferred Stock and Series B
Preferred Stock immediately before that
change.
(5) No Impairment. The Corporation will
not, by amendment of its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this
subsection 1(f) and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion
Rights of the holders of the Series A Preferred Stock and
Series B Preferred Stock against impairment.
(6) Certificate as to Adjustments. Upon
the occurrence of each adjustment or readjustment of a
Conversion Price pursuant to this subsection 1(f), the
Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof
and furnish to each holder of Series A Preferred Stock and
Series B Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any
holder of Series A Preferred Stock or Series B Preferred
Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price for such series at
the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the
time would be received upon the conversion of such holder's
shares of Series A Preferred Stock or Series B Preferred
Stock.
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<PAGE> 17
(7) Residual Rights. All rights accruing to
the outstanding shares of the Corporation not expressly
provided for to the contrary herein shall be vested with the
Common Stock.
2. SHARES ACQUIRED BY THE CORPORATION. Shares of Common
Stock that have been acquired by the Corporation shall become treasury shares
and may be resold or otherwise disposed of by the Corporation for such
consideration, not less than the par value thereof, as shall be determined by
the Board of Directors, unless or until the Board of Directors shall by
resolution provide that any or all treasury shares so acquired shall constitute
authorized, but unissued shares.
ARTICLE VI.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
any improper personal benefit. If the Delaware General Corporation Law is
amended after approval by the stockholders of this Article to authorize
Corporation action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law as so amended.
ARTICLE VII.
The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in
the manner provided in, the Bylaws of the Corporation.
ARTICLE VIII.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX.
Election of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Corporation shall so
provide.
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ARTICLE X.
A. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term
for which they are elected, and until their successors have been duly elected
and qualified; except that if any such election shall not be so held, such
election shall take place at a stockholders' meeting called and held in
accordance with the Delaware General Corporation Law. At the annual meeting
of stockholders (the "First Public Company Annual Meeting") following the
closing of a public offering of the Corporation's capital stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended (a "Public Offering"), the directors of the Corporation shall be
divided into three classes as nearly equal in size as is practicable, hereby
designated as Class I, Class II and Class III. The term of office of the
initial Class I directors shall expire at the next succeeding annual meeting of
stockholders, the term of office of the initial Class II directors shall expire
at the second succeeding annual meeting of stockholders and the term of office
of the initial Class III directors shall expire at the third succeeding annual
meeting of stockholders. For the purposes hereof, the initial Class I, Class
II and Class III directors shall be those directors designated and elected at
the First Public Company Annual Meeting. At each annual meeting after the
First Public Company Annual Meeting, directors to replace those of a Class
whose terms expire at such annual meeting shall be elected to hold office until
the third succeeding annual meeting and until their respective successors shall
have been duly elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as is practicable.
B. Vacancies occurring on the Board of Directors for any reason
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at a meeting of the Board of Directors.
A person so elected by the Board of Directors to fill a vacancy shall hold
office until the next succeeding annual meeting of stockholders of the
Corporation and until his or her successor shall have been duly elected and
qualified.
ARTICLE XI.
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
ARTICLE XII.
Effective upon the closing of a Public Offering, stockholders of the
Corporation may not take action by written consent in lieu of a meeting but
must take any actions at a duly called annual or special meeting.
ARTICLE XIII.
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative
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vote of the holders of the capital stock required by law or this Certificate of
Incorporation, the affirmative vote of the holders of at least two-thirds (2/3)
of the combined voting power of all of the then-outstanding shares of the
Corporation entitled to vote shall be required to alter, amend or repeal
Articles X, XII or XIII or any provisions thereof, unless such amendment shall
be approved by a majority of the directors of the Corporation not affiliated or
associated with any person or entity holding (or which has announced an
intention to obtain) 26% or more of the voting power of the Corporation's
outstanding capital stock.
ARTICLE XIV.
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
* * *
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THE UNDERSIGNED, being the incorporator hereinbefore named,
for the purpose of forming a corporation to do business both within and without
the State of Delaware and in pursuance of the General Corporation Law of
Delaware, does make and file this Certificate, hereby declaring and certifying
that the facts herein stated are true, and accordingly has hereunto set his
hand this 5th day of December, 1997.
/s/ Brad Eastman
-------------------------
Brad Eastman,
Incorporator
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EXHIBIT 3.2
BYLAWS
OF
ISS GROUP, INC.,
A DELAWARE CORPORATION
- --------------------------------------------------------------------------------
ARTICLE I
Offices
Section 1. Registered Office. The registered office of the
corporation shall be the office of The Corporation Trust Company, 1209 Orange
Street, Wilmington, County of New Castle, Delaware 19801.
Section 2. Other Offices. The corporation may have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
Corporate Seal
Section 3. Corporate Seal. The corporate seal shall consist of
a die bearing the name of the corporation. Said seal may be used by causing
it, or a facsimile thereof, to be impressed or affixed or reproduced or
otherwise.
ARTICLE III
Stockholders' Meetings
Section 4. Place of Meetings. Meetings of the stockholders of
the corporation shall be held at such place, either within or without the State
of Delaware, as may be designated from time to time by the Board of Directors,
or, if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
Section 5. Annual Meeting.
(a) The annual meeting of the stockholders of the
corporation, for the purpose of election of Directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought
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before an annual meeting, business must be: (A) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days in advance of the date of the Notice of Annual Meeting
released to stockholders in connection with the previous year's annual meeting
of stockholders; provided, however, that in the event that no annual meeting
was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's notice of annual meeting, notice by the stockholder to be
timely must be so received a reasonable time before the notice of annual
meeting is released to stockholders. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting: (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address, as they appear on the corporation's
books, of the stockholder proposing such business, (iii) the class and number
of shares of the corporation which are beneficially owned by the stockholder,
(iv) any material interest of the stockholder in such business and (v) any
other information that is required to be provided by the stockholder pursuant
to Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), in such stockholder's capacity as a proponent to a stockholder
proposal. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairperson of the annual
meeting shall, if the facts warrant, determine and declare at the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if the chairperson should so determine,
the chairperson shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of
the corporation may be made at a meeting of stockholders by or at the direction
of the Board of Directors or by any stockholder of the corporation entitled to
vote in the election of Directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant
to timely notice in writing to the Secretary of the corporation in accordance
with the provisions of paragraph (b) of this Section 5. Such stockholder's
notice shall set forth (i) as to each person, if any, whom the stockholder
proposes to nominate for election or re-election as a Director: (A) the name,
age, business address and residence address of such person, (B) the principal
occupation or employment of such person, (C) the class and number of shares of
the corporation which are beneficially owned by such person, (D) a description
of all arrangements or understandings
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between the stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nominations are to be
made by the stockholder, and (E) any other information relating to such person
that is required to be disclosed in solicitations of proxies for election of
Directors, or is otherwise required in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
Director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section
5. At the request of the Board of Directors, any person nominated by a
stockholder for election as a Director shall furnish to the Secretary of the
corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be
eligible for election as a Director of the corporation unless nominated in
accordance with the procedures set forth in this paragraph (c). The
chairperson of the meeting shall, if the facts warrant, determine and declare
at the meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and if the chairperson should so determine, the
chairperson shall so declare at the meeting, and the defective nomination shall
be disregarded.
Section 6. Special Meetings.
(a) Special meetings of the stockholders of the corporation
may be called, for any purpose or purposes, by (i) the Chairperson of the Board
of Directors, (ii) the President or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption).
(b) If a special meeting is called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairperson of the Board of Directors, the
President, or the Secretary of the corporation. No business may be transacted
at such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall
cause notice to be given to the stockholders entitled to vote, in accordance
with the provisions of Section 7 of these Bylaws. If the notice is not given
within sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as
limiting, fixing or affecting the time when a meeting of stockholders called by
action of the Board of Directors may be held.
Section 7. Notice of Meetings. Except as otherwise provided by
law or the Certificate of Incorporation, as the same may be amended or restated
(hereinafter, the
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"Certificate of Incorporation"), written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date, time and purpose or purposes of the meeting.
Notice of any meeting of stockholders may be waived in writing, signed by the
person entitled to notice thereof, either before or after such meeting, and
will be waived by any stockholder by his attendance thereat in person or by
proxy, except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Any stockholder so
waiving notice of such meeting shall be bound by the proceedings of any such
meeting in all respects as if due notice thereof had been given.
Section 8. Quorum. At all meetings of stockholders, except
where otherwise provided by statute or by the Certificate of Incorporation, or
by these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairperson of the meeting or by vote of the holders of a majority of
the shares represented thereat, but no other business shall be transacted at
such meeting. The stockholders present at a duly called or convened meeting,
at which a quorum is present, may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave
less than a quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, all action taken by the holders of a majority of
the votes cast, excluding abstentions, at any meeting at which a quorum is
present shall be valid and binding upon the corporation; provided, however,
that Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote
on the election of Directors. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum entitled
to take action with respect to that vote on that matter and the affirmative
vote of the majority (plurality, in the case of the election of Directors) of
shares of such class or classes present in person or represented by proxy at
the meeting shall be the act of such class.
Section 9. Adjournment and Notice of Adjourned Meetings. Any
meeting of stockholders, whether annual or special, may be adjourned from time
to time either by the chairperson of the meeting or by the vote of a majority
of the shares casting votes, excluding abstentions. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the corporation may transact
any business which might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
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Section 10. Voting Rights. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the
stock records of the corporation on the record date, as provided in Section 12
of these Bylaws, shall be entitled to vote at any meeting of stockholders.
Every person entitled to vote or execute consents shall have the right to do so
either in person or by an agent or agents authorized by a written proxy
executed by such person or his duly authorized agent, which proxy shall be
filed with the Secretary at or before the meeting at which it is to be used.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a
longer period. Elections of Directors need not be by written ballot, unless
otherwise provided in the Certificate of Incorporation.
Section 11. Joint Owners of Stock. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, tenants by the entirety, or otherwise, or if two (2) or more persons
have the same fiduciary relationship respecting the same shares, unless the
Secretary is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1)
votes, the act of the majority so voting binds all; (c) if more than one (1)
votes, but the vote is evenly split on any particular matter, each faction may
vote the securities in question proportionally, or may apply to the Delaware
Court of Chancery for relief as provided in the General Corporation Law of
Delaware, Section 217(b). If the instrument filed with the Secretary shows
that any such tenancy is held in unequal interests, a majority or even-split
for the purpose of clause (c) shall be a majority or even-split in interest.
Section 12. List of Stockholders. The Secretary shall prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 13. No Action Without Meeting. Effective upon the
closing of the corporation's initial public offering of securities pursuant to
a registration statement filed under the Securities Act of 1933, as amended (a
"Public Offering"), the stockholders of the corporation may not take action by
written consent without a meeting and must take any actions at a duly called
annual or special meeting. Meetings of stockholders may be held within or
without the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept
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(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in these Bylaws of the corporation.
Section 14. Organization.
(a) At every meeting of stockholders, the Chairperson of the
Board of Directors, or, if a Chairperson has not been appointed, is absent, or
designates the next senior officer present to so act, the President, or, if the
President is absent, the most senior Vice President present, or, in the absence
of any such officer, a chairperson of the meeting chosen by a majority in
interest of the stockholders entitled to vote, present in person or by proxy,
shall act as chairperson. The Secretary, or, in his absence, an Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
(b) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to
such rules and regulations of the Board of Directors, if any, the chairperson
of the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairperson, are necessary, appropriate or convenient for the proper conduct of
the meeting, including, without limitation, establishing an agenda or order of
business for the meeting, rules and procedures for maintaining order at the
meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized
and constituted proxies and such other persons as the chairperson shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairperson of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
ARTICLE IV
Directors
Section 15. Number and Term of Office. The number of Directors
which shall constitute the whole of the Board of Directors shall be seven (7).
The number of authorized Directors may be modified from time to time by
amendment of this Section 15 in accordance with the provisions of Section 44
hereof. At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, and until their successors have been duly elected and qualified;
except that if any such election shall not be so held, such election shall take
place at a stockholders' meeting called and held in accordance with the
Delaware General Corporation Law. After the Corporation's first Public
Offering, the directors of the corporation shall be divided into three classes
as nearly
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equal in size as is practicable, hereby designated Class I, Class II and Class
III. The term of office of the initial Class I directors shall expire at the
next succeeding annual meeting of stockholders, the term of office of the
initial Class II directors shall expire at the second succeeding annual meeting
of stockholders and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of stockholders. At each annual
meeting of stockholders thereafter, directors to replace those of a class whose
terms expire at such annual meeting shall be elected to hold office until the
third succeeding annual meeting and until their respective successors shall
have been duly elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as is practicable.
The number of directors which constitute the whole board of
directors of the Corporation shall be designated in the Bylaws of the
corporation or by resolution adopted by the Board of Directors. Vacancies
occurring on the Board of Directors for any reason may be filled by vote of a
majority of the remaining members of the Board of Directors, although less than
a quorum, at any meeting of the Board of Directors. A person so elected by the
Board of Directors to fill a vacancy shall hold office until the next
succeeding annual meeting of stockholders of the corporation and until his or
her successor shall have been duly elected and qualified. Directors need not
be stockholders unless so required by the Certificate of Incorporation. If,
for any reason, the Directors shall not have been elected at an annual meeting,
they may be elected as soon thereafter as convenient at a special meeting of
the stockholders called for that purpose in the manner provided in these
Bylaws.
Section 16. Powers. The powers of the corporation shall be
exercised, its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the Certificate
of Incorporation.
Section 17. Vacancies. Unless otherwise provided in the
Certificate of Incorporation, vacancies and newly created directorships
resulting from any increase in the authorized number of Directors may be filled
by a majority of the Directors then in office, although less than a quorum, or
by a sole remaining Director, and each Director so elected shall hold office
for the unexpired portion of the term of the Director whose place shall be
vacant and until his or her successor shall have been duly elected and
qualified. A vacancy in the Board of Directors shall be deemed to exist under
this Section 17 in the case of the death, removal or resignation of any
Director, or if the stockholders fail at any meeting of stockholders at which
Directors are to be elected (including any meeting referred to in Section 19
below) to elect the number of Directors then constituting the whole Board of
Directors.
Section 18. Resignation. Any Director may resign at any time by
delivering his or her written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such
specification is made, it shall be deemed effective at the pleasure of the
Board of Directors. When one or more Directors shall resign from the Board of
Directors, effective at
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a future date, a majority of the Directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
Section 19. Removal. At a special meeting of stockholders called
for the purpose in the manner hereinabove provided, subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors, or
any individual Director, may be removed from office, with or without cause, and
a new Director or Directors elected by a vote of stockholders holding a
majority of the outstanding shares entitled to vote at an election of
Directors.
Section 20. Meetings.
(a) Annual Meetings. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an
annual meeting of the Board of Directors shall be necessary and such meeting
shall be held for the purpose of electing officers and transacting such other
business as may lawfully come before it.
(b) Regular Meetings. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be held in the
office of the corporation required to be maintained pursuant to Section 2
hereof. Unless otherwise restricted by the Certificate of Incorporation,
regular meetings of the Board of Directors may also be held at any place within
or without the State of Delaware which has been designated by resolution of the
Board of Directors or the written consent of all directors.
(c) Special Meetings. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairperson of the Board, the President or any two of the
Directors.
(d) Telephone Meetings. Any member of the Board of
Directors, or of any committee thereof, may participate in a meeting by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting by such means shall constitute presence in person at such meeting.
(e) Notice of Meetings. Written notice of the time and
place of all special meetings of the Board of Directors shall be given at least
one (1) day before the date of the meeting. Notice of any meeting may be
waived in writing at any time before or after the meeting and will be waived by
any Director by attendance thereat, except when the Director attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called
or convened.
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(f) Waiver of Notice. The transaction of all business at
any meeting of the Board of Directors, or any committee thereof, however called
or noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either
before or after meeting, each of the Directors not present shall sign a written
waiver of notice, or a consent to holding such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Section 21. Quorum and Voting.
(a) Unless the Certificate of Incorporation requires a
greater number and except with respect to indemnification questions arising
under Section 42 hereof, for which a quorum shall be one-third of the exact
number of Directors fixed from time to time in accordance with Section 15
hereof, but not less than one (1), a quorum of the Board of Directors shall
consist of a majority of the exact number of directors fixed from time to time
in accordance with Section 15 of these Bylaws, but not less than one (1);
provided, however, at any meeting whether a quorum be present or otherwise, a
majority of the Directors present may adjourn from time to time until the time
fixed for the next regular meeting of the Board of Directors, without notice
other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by a vote of
the majority of the Directors present, unless a different vote is required by
law, the Certificate of Incorporation or these Bylaws.
Section 22. Action Without Meeting. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
such writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
Section 23. Fees and Compensation. Directors shall be entitled
to such compensation for their services as may be approved by the Board of
Directors, including, if so approved, by resolution of the Board of Directors,
a fixed sum and expenses of attendance, if any, for attendance at each regular
or special meeting of the Board of Directors and at any meeting of a committee
of the Board of Directors. Nothing herein contained shall be construed to
preclude any Director from serving the corporation in any other capacity as an
officer, agent, employee, or otherwise and receiving compensation therefor.
Section 24. Committees.
(a) Executive Committee. The Board of Directors may by
resolution passed by a majority of the whole Board of Directors appoint an
Executive Committee to consist of one
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(1) or more members of the Board of Directors. The Executive Committee, to the
extent permitted by law and specifically granted by the Board of Directors,
shall have, and may exercise when the Board of Directors is not in session, all
powers of the Board of Directors in the management of the business and affairs
of the corporation, including, without limitation, the power and authority to
declare a dividend or to authorize the issuance of stock, except such committee
shall not have the power or authority to amend the Certificate of
Incorporation, to adopt an agreement of merger or consolidation, to recommend
to the stockholders the sale, lease or exchange of all or substantially all of
the corporation's property and assets, to recommend to the stockholders of the
corporation a dissolution of the corporation or a revocation of a dissolution
or to amend these Bylaws.
(b) Other Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, from time to
time appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall such committee have the powers denied to the
Executive Committee in these Bylaws.
(c) Term. Each member of a committee of the Board of
Directors shall serve a term on the committee coexistent with such member's
term on the Board of Directors. The Board of Directors, subject to the
provisions of subsections (a) or (b) of this Bylaw may at any time increase or
decrease the number of members of a committee or terminate the existence of a
committee. The membership of a committee member shall terminate on the date of
his or her death or voluntary resignation from the committee or from the Board
of Directors. The Board of Directors may at any time for any reason remove any
individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(d) Meetings. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or any other
committee appointed pursuant to this Section 24 shall be held at such times and
places as are determined by the Board of Directors, or by any such committee,
and when notice thereof has been given to each member of such committee, no
further notice of such regular meetings need be given thereafter. Special
meetings of any such committee may be held at any place which has been
determined from time to time by such committee, and may be called by any
Director who is a member of such committee, upon written notice to the members
of such committee of the time and place of such
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special meeting given in the manner provided for the giving of written notice
to members of the Board of Directors of the time and place of special meetings
of the Board of Directors. Notice of any special meeting of any committee may
be waived in writing at any time before or after the meeting and will be waived
by any Director by attendance thereat, except when the Director attends such
special meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. A majority of the authorized number of members of any such
committee shall constitute a quorum for the transaction of business, and the
act of a majority of those present at any meeting at which a quorum is present
shall be the act of such committee.
Section 25. Organization. The Chairperson of the Board shall
preside at every meeting of the Board of Directors, if present. In the case of
any meeting, if there is no Chairperson of the Board or if the Chairperson is
not present, a chairperson chosen by a majority of the directors present shall
act as chairperson of such meeting. The Secretary of the corporation or, in
the absence of the Secretary, any person appointed by the Chairperson shall act
as secretary of the meeting.
ARTICLE V
Officers
Section 26. Officers Designated. The officers of the corporation
shall include, if and when designated by the Board of Directors, the
Chairperson of the Board of Directors, the Chief Executive Officer, the
President, one or more Vice Presidents, the Secretary, the Chief Financial
Officer and the Treasurer, all of whom shall be elected at the annual
organizational meeting of the Board of Directors. The order of the seniority
of the Vice Presidents shall be in the order of their nomination, unless
otherwise determined by the Board of Directors. The Board of Directors may
also appoint one or more Assistant Secretaries, Assistant Treasurers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by
the Board of Directors.
Section 27. Tenure and Duties of Officers.
(a) General. All officers shall hold office at the
pleasure of the Board of Directors and until their successors shall have been
duly elected and qualified, unless sooner removed. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board of
Directors. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
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(b) Duties of Chairperson of the Board of Directors. The
Chairperson of the Board of Directors, when present, shall preside at all
meetings of the Board of Directors and, unless the Chairperson has designated
the next senior officer to so preside, at all meetings of the stockholders.
The Chairperson of the Board of Directors shall perform other duties commonly
incident to such office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time.
(c) Duties of the Chief Executive and Chief Operating
Officers. Unless the Board of Directors designates otherwise, the Chairperson
of the Board shall be the chief executive officer of the corporation and the
President shall be the chief operating officer of the corporation. Subject to
the control of the Board of Directors, the chief executive officer shall have
general executive charge, management and control, of the properties, business
and operations of the corporation with all such powers as may be reasonably
incident to such responsibilities; and subject to the control of the chief
executive officer, the chief operating officer shall have general operating
charge, management and control, of the properties, business and operations of
the corporation with all such powers as may be reasonably incident to such
responsibilities. The chief executive officer and, if and to the extent
designated by the chief executive officer, the chief operating officer, may
agree upon and execute all leases, contracts, evidences of indebtedness and
other obligations in the name of the corporation and may sign all certificates
for shares of capital stock of the corporation, and each shall have such other
powers and duties as are designated in accordance with these Bylaws and as from
time to time may be assigned to each by the Board of Directors.
(d) Duties of President. Unless the Board of Directors
otherwise determines, subject to the control of the chief executive officer,
the President shall have the authority to agree upon and exercise all leases,
contracts, evidences of indebtedness and other obligations in the name of the
corporation; and, unless the Board of Directors otherwise determines, he shall,
in the absence of the Chairperson of the Board or if there be no Chairperson of
the Board, preside at all meetings of the stockholders and (should he be a
director) of the Board of Directors, and the President shall have such other
powers and duties as designated in accordance with these Bylaws and as from
time to time may be assigned to him by the Board of Directors.
(e) Duties of Vice Presidents. If and to the extent
determined by the Board of Directors, the Vice Presidents, in the order of
their seniority, may assume and perform the duties of the President in the
absence or disability of the President or whenever the office of President is
vacant. The Vice Presidents shall perform other duties commonly incident to
their office and shall also perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time.
(f) Duties of Secretary. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any
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committee thereof requiring notice. The Secretary shall perform all other
duties given in these Bylaws and other duties commonly incident to such office
and shall also perform such other duties and have such other powers as the
Board of Directors shall designate from time to time. The President may direct
any Assistant Secretary to assume and perform the duties of the Secretary in
the absence or disability of the Secretary, and each Assistant Secretary shall
perform other duties commonly incident to such office and shall also perform
such other duties and have such other powers as the Board of Directors or the
President, shall designate from time to time.
(g) Duties of Chief Financial Officer. The Chief
Financial Officer shall keep or cause to be kept the books of account of the
corporation in a thorough and proper manner and shall render statements of the
financial affairs of the corporation in such form and as often as required by
the Board of Directors, the Chairperson of the Board or the President. The
Chief Financial Officer, subject to the order of the Board of Directors, shall
have the custody of all funds and securities of the corporation. The Chief
Financial Officer shall perform other duties commonly incident to such office
and shall also perform such other duties and have such other powers as the
Board of Directors, the Chairperson of the Board or the President shall
designate from time to time. The Chairperson of the Board or the President may
direct the Treasurer or any Assistant Treasurer to assume and perform the
duties of the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Assistant Treasurer shall perform other duties
commonly incident to such office and shall also perform such other duties and
have such other powers as the Board of Directors, the Chairperson of the Board
or the President shall designate from time to time.
Section 28. Delegation of Authority. The Board of Directors may
from time to time delegate the powers or duties of any officer to any other
officer or agent, notwithstanding any provision hereof.
Section 29. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
Section 30. Removal. Any officer may be removed from office at
any time, either with or without cause, by the vote or written consent of a
majority of the Directors in office at the time, or by any committee or
superior officers upon whom such power of removal may have been conferred by
the Board of Directors.
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ARTICLE VI
Execution of Corporate Instruments and Voting
of Securities Owned by the Corporation
Section 31. Execution of Corporate Instruments. The Board of
Directors may, in its discretion, determine the method and designate the
signatory officer or officers, or other person or persons, to execute on behalf
of the corporation any corporate instrument or document, or to sign on behalf
of the corporation the corporate name without limitation, or to enter into
contracts on behalf of the corporation, except where otherwise provided by law
or these Bylaws, and such execution or signature shall be binding upon the
corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and
other evidences of indebtedness of the corporation, and other corporate
instruments or documents requiring the corporate seal, and certificates of
shares of stock owned by the corporation, shall be executed, signed or endorsed
by the Chairperson of the Board of Directors, or the President or any Vice
President, and by the Secretary or Chief Financial Officer or Treasurer or any
Assistant Secretary or Assistant Treasurer. All other instruments and
documents requiring the corporate signature, but not requiring the corporate
seal, may be executed as aforesaid or in such other manner as may be directed
by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall
be signed by such person or persons as the Board of Directors shall authorize
so to do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
Section 32. Voting of Securities Owned by the Corporation. All
stock and other securities of other corporations owned or held by the
corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person
authorized so to do by resolution of the Board of Directors, or, in the absence
of such authorization, by the Chairperson of the Board of Directors, the
President, or any Vice President.
ARTICLE VII
Shares of Stock
Section 33. Form and Execution of Certificates. Certificates for
the shares of stock of the corporation shall be in such form as is consistent
with the Certificate of Incorporation and applicable law. Every holder of
stock in the corporation shall be entitled to have a certificate signed by or
in the name of the corporation by the Chairperson of the Board of Directors, or
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the President or any Vice President and by the Secretary or Chief Financial
Officer or Treasurer or any Assistant Treasurer or Assistant Secretary,
certifying the number of shares owned by him in the corporation. Where such
certificate is countersigned by a transfer agent other than the corporation or
its employee, or by a registrar other than the corporation or its employee, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued with
the same effect as if he were such officer, transfer agent, or registrar at the
date of issue. Each certificate shall state upon the face or back thereof, in
full or in summary, all of the designations, preferences, limitations,
restrictions on transfer and relative rights of the shares authorized to be
issued.
Section 34. Lost Certificates. A new certificate or certificates
shall be issued in place of any certificate or certificates theretofore issued
by the corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. The corporation may require, as a
condition precedent to the issuance of a new certificate or certificates, the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
or to give the corporation a surety bond in such form and amount as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
Section 35. Transfers.
(a) Transfers of record of shares of stock of the corporation
shall be made only on its books by the holders thereof, in person or by
attorney duly authorized and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or more
classes of stock of the corporation to restrict the transfer of shares of stock
of the corporation of any one or more classes owned by such stockholders in any
manner not prohibited by the Delaware General Corporation Law.
Section 36. Fixing Record Dates.
(a) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting. If no record date is fixed by the Board of Directors,
the record date for determining stockholders entitled to notice of or to vote
at a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or if notice is waived, at the
close of
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business on the day next preceding the day on which the meeting is held. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
(b) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix, in advance, a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is fixed
by the Board of Directors, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
Section 37. Registered Stockholders. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE VIII
Other Securities of the Corporation
Section 38. Execution of Other Securities. All bonds, debentures
and other corporate securities of the corporation, other than stock
certificates (covered in Section 33), may be signed by the Chairperson of the
Board of Directors, the President or any Vice President, or such other person
as may be authorized by the Board of Directors, and the corporate seal
impressed thereon or a facsimile of such seal imprinted thereon and attested by
the signature of the Secretary or an Assistant Secretary, or the Chief
Financial Officer or Treasurer or an Assistant Treasurer; provided, however,
that where any such bond, debenture or other corporate security shall be
authenticated by the manual signature of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such
bond, debenture or other corporate security may be the imprinted facsimile of
the signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation
or such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before any bond,
debenture or other corporate security so signed or attested shall have been
delivered, such bond, debenture or other corporate
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security nevertheless may be adopted by the corporation and issued and
delivered as though the person who signed the same or whose facsimile signature
shall have been used thereon had not ceased to be such officer of the
corporation.
ARTICLE IX
Dividends
Section 39. Declaration of Dividends. Dividends upon the capital
stock of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to
law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation.
Section 40. Dividend Reserve. Before payment of any dividend,
there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the Board of Directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the Board of
Directors shall think conducive to the interests of the corporation, and the
Board of Directors may modify or abolish any such reserve in the manner in
which it was created.
ARTICLE X
Fiscal Year
Section 41. Fiscal Year. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors.
ARTICLE XI
Indemnification
Section 42. Indemnification of Directors, Officers, Employees
and Other Agents.
(a) Directors and Executive Officers. The corporation
shall indemnify its Directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
corporation may limit the extent of such indemnification by individual
contracts with its Directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any Director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person or any proceeding by such person against the corporation or its
Directors, officers, employees or other agents unless (i) such indemnification
is expressly required to be made by law, (ii) the proceeding was authorized by
the Board of Directors of the corporation or (iii) such indemnification is
provided by the corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the Delaware General Corporation Law.
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(b) Other Officers, Employees and Other Agents. The
corporation shall have power to indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law.
(c) Good Faith.
(1) For purposes of any determination under this
Bylaw, a Director or executive officer shall be deemed to have acted
in good faith and in a manner such officer reasonably believed to be
in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, to have had no
reasonable cause to believe that such officer's conduct was unlawful,
if such officer's action is based on information, opinions, reports
and statements, including financial statements and other financial
data, in each case prepared or presented by:
(a) one or more officers or employees of the
corporation whom the Director or executive officer believed to be
reliable and competent in the matters presented;
(b) counsel, independent accountants or
other persons as to matters which the Director or executive officer
believed to be within such person's professional competence; and
(c) with respect to a Director, a committee
of the Board upon which such Director does not serve, as to matters
within such committee's designated authority, which committee the
Director believes to merit confidence; so long as, in each case, the
Director or executive officer acts without knowledge that would cause
such reliance to be unwarranted.
(2) The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which such person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
proceeding, that such person had reasonable cause to believe that his
conduct was unlawful.
(3) The provisions of this paragraph (c) shall
not be deemed to be exclusive or to limit in any way the circumstances
in which a person may be deemed to have met the applicable standard of
conduct set forth by the Delaware General Corporation Law.
(d) Expenses. The corporation shall advance, prior to
the final disposition of any proceeding, promptly following request therefor,
all expenses incurred by any Director or executive officer in connection with
such proceeding upon receipt of an undertaking by or on behalf of such person
to repay said amounts if it should be determined ultimately that such person is
not entitled to be indemnified under this Bylaw or otherwise.
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Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation if a
determination is reasonably and promptly made (i) by the Board of Directors by
a majority vote of a quorum consisting of Directors who were not parties to the
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such
person acted in bad faith or in a manner that such person did not believe to be
in or not opposed to the best interests of the corporation.
(e) Enforcement. Without the necessity of entering into
an express contract, all rights to indemnification and advances to Directors
and executive officers under this Bylaw shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a contract
between the corporation and the Director or executive officer. Any right to
indemnification or advances granted by this Bylaw to a Director or executive
officer shall be enforceable by or on behalf of the person holding such right
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim
is made within ninety (90) days of request therefor. The claimant in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. The corporation shall be
entitled to raise as a defense to any such action that the claimant has not met
the standards of conduct that make it permissible under the Delaware General
Corporation Law for the corporation to indemnify the claimant for the amount
claimed. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because such person has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action
or create a presumption that claimant has not met the applicable standard of
conduct.
(f) Non-Exclusivity of Rights. The rights conferred on
any person by this Bylaw shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts with
any or all of its Directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law.
(g) Survival of Rights. The rights conferred on any
person by this Bylaw shall continue as to a person who has ceased to be a
Director, officer, employee or other agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
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(h) Insurance. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval by the Board
of Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Bylaw.
(i) Amendments. Any repeal or modification of this Bylaw
shall only be prospective and shall not affect the rights under this Bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
(j) Saving Clause. If this Bylaw or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each Director and executive
officer to the full extent not prohibited by any applicable portion of this
Bylaw that shall not have been invalidated, or by any other applicable law.
(k) Certain Definitions. For the purposes of this Bylaw,
the following definitions shall apply:
(1) The term "proceeding" shall be broadly
construed and shall include, without limitation, the investigation,
preparation, prosecution, defense, settlement, arbitration and appeal
of, and the giving of testimony in, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(2) The term "expenses" shall be broadly
construed and shall include, without limitation, court costs,
attorneys' fees, witness fees, fines, amounts paid in settlement or
judgment and any other costs and expenses of any nature or kind
incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Bylaw
with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate
existence had continued.
(4) References to a "director," "officer,"
"employee," or "agent" of the corporation shall include without
limitation, situations where such person is serving at the request of
the corporation as a director, officer, employee, trustee or agent of
another corporation, partnership, joint venture, trust or other
enterprise.
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(5) References to "other enterprises" shall
include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
Notices
Section 43. Notices.
(a) Notice to Stockholders. Whenever, under any
provisions of these Bylaws, notice is required to be given to any stockholder,
it shall be given in writing, timely and duly deposited in the United States
mail, postage prepaid, and addressed to such stockholder's last known post
office address as shown by the stock record of the corporation or its transfer
agent.
(b) Notice to Directors. Any notice required to be given
to any Director may be given by the method stated in subsection (a), or by
facsimile, telex or telegram, except that such notice other than one which is
delivered personally shall be sent to such address as such Director shall have
filed in writing with the Secretary, or, in the absence of such filing, to the
last known post office address of such Director.
(c) Address Unknown. If no address of a stockholder or
Director be known, notice may be sent to the office of the corporation required
to be maintained pursuant to Section 2 hereof.
(d) Affidavit of Mailing. An affidavit of mailing,
executed by a duly authorized and competent employee of the corporation or its
transfer agent appointed with respect to the class of stock affected,
specifying the name and address or the names and addresses of the stockholder
or stockholders, or Director or Directors, to whom any such notice or notices
was or were given, and the time and method of giving the same, shall be
conclusive evidence of the statements therein contained.
(e) Time Notices Deemed Given. All notices given by
mail, as above provided, shall be deemed to have been given as at the time of
mailing, and all notices given by facsimile, telex or telegram shall be deemed
to have been given as of the sending time recorded at the time of transmission.
(f) Methods of Notices. It shall not be necessary that
the same method of giving notice be employed in respect of all Directors, but
one permissible method may be
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employed in respect of any one or more, and any other permissible method or
methods may be employed in respect of any other or others.
(g) Failure to Receive Notice. The period or limitation
of time within which any stockholder may exercise any option or right, or enjoy
any privilege or benefit, or be required to act, or within which any Director
may exercise any power or right, or enjoy any privilege, pursuant to any notice
sent such person in the manner above provided, shall not be affected or
extended in any manner by the failure of such stockholder or such Director to
receive such notice.
(h) Notice to Person with Whom Communication Is Unlawful.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(i) Notice to Person with Undeliverable Address.
Whenever notice is required to be given, under any provision of law or the
Certificate of Incorporation or Bylaws of the corporation, to any stockholder
to whom (i) notice of two consecutive annual meetings, and all notices of
meetings to such person during the period between such two consecutive annual
meetings, or (ii) all, and at least two, payments (if sent by first class mail)
of dividends or interest on securities during a twelve-month period, have been
mailed addressed to such person at such person's address as shown on the
records of the corporation and have been returned undeliverable, the giving of
such notice to such person shall not be required. Any action or meeting which
shall be taken or held without notice to such person shall have the same force
and effect as if such notice had been duly given. If any such person shall
deliver to the corporation a written notice setting forth such person's then
current address, the requirement that notice be given to such person shall be
reinstated. In the event that the action taken by the corporation is such as
to require the filing of a certificate under any provision of the Delaware
General Corporation Law, the certificate need not state that notice was not
given to persons to whom notice was not required to be given pursuant to this
paragraph.
22
<PAGE> 23
ARTICLE XIII
Amendments
Section 44. Amendments. Except as otherwise set forth in
paragraph (i) of Section 42 of these Bylaws, these Bylaws may be amended or
repealed and new Bylaws adopted by the stockholders entitled to vote. The
Board of Directors shall have the power, if such power is conferred upon the
Board of Directors by the Certificate of Incorporation, to adopt amend or
repeal Bylaws (including, without limitation, the amendment of any Bylaw
setting forth the number of Directors who shall constitute the whole Board of
Directors).
ARTICLE XIV
Loans to Officers
Section 45. Loans to Officers. The corporation may lend money to,
or guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiaries, including any officer or
employee who is a Director of the corporation or its subsidiaries, whenever, in
the judgment of the Board of Directors, such loan, guarantee or assistance may
reasonably be expected to benefit the corporation. The loan, guarantee or other
assistance may be with or without interest and may be unsecured, or secured in
such manner as the Board of Directors shall approve, including, without
limitation, a pledge of shares of stock of the corporation. Nothing in this
Bylaw shall be deemed to deny, limit or restrict the powers of guaranty or
warranty of the corporation at common law or under statute.
ARTICLE XV
Annual Report
Section 46. Annual Report. (a) Subject to the provisions of
Section 46(b) below, the Board of Directors shall cause an annual report to be
sent to each stockholder of the corporation not later than one hundred twenty
(120) days after the close of the corporation's fiscal year. Such report shall
include a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year,
accompanied by any report thereon of independent accounts or, if there is no
such report, the certificate of an authorized officer of the corporation that
such statements were prepared without audit from the books and records of the
corporation. Such report shall be sent to stockholders at least fifteen (15)
days prior to the next annual meeting of stockholders after the end of the
fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of
record of the corporation's shares, the requirement of sending of an annual
report to the stockholders of the corporation is hereby expressly waived.
23
<PAGE> 1
EXHIBIT 10.1
ISS GROUP, INC.
RESTATED 1995 STOCK INCENTIVE PLAN
(Amended and Restated through December 4, 1997)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This Restated 1995 Stock Incentive Plan is intended to promote
the interests of ISS Group, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to
such terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three (3) separate equity
programs:
(i) the Discretionary Option Grant Program
under which eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which
eligible persons may, at the discretion of the Plan Administrator, be
issued shares of Common Stock directly, either through the immediate
purchase of such shares or as a bonus for services rendered the
Corporation (or any Parent or Subsidiary), and
(iii) the Automatic Option Grant Program under
which eligible non-employee Board members shall automatically receive
options at periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
<PAGE> 2
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12(g) Registration Date, the Plan shall be
administered by the Board.
B. Beginning with the Section 12(g) Registration Date, the Board shall
have the authority to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to Section 16 Insiders but may delegate such
authority in whole or in part to the Primary Committee. Administration of the
Plan with respect to all other persons eligible to participate may, at the
Board's discretion, be vested in the Primary Committee or a Secondary Committee,
or the Board may retain the power to administer the Plan with respect to all
such persons.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue such
interpretations of, the provisions of such Plan and any outstanding options or
stock issuances thereunder as it may deem necessary or advisable. Decisions of
the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Plan or any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of such program.
IV. ELIGIBILITY
A. Prior to the Section 12(g) Registration Date, only Employees shall
be eligible to participate in the Plan.
B. Beginning with the Section 12(g) Registration Date, the persons
eligible to participate in the Discretionary Option Grant and Stock issuance
Programs shall be as follows:
(i) Employees,
2.
<PAGE> 3
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
C. Only non-employee Board members shall be eligible to participate in
the Automatic Option Grant Program.
D. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, (i) with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be made,
the number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares and the maximum term for which the option
is to remain outstanding and (ii) with respect to stock issuances under the
Stock Issuance Program, which eligible persons are to receive stock issuances,
the time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid for such shares.
E. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 3,000,000
shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year, beginning with the 1999 calendar year, by an amount equal to three percent
(3.0%) of the total number of shares of Common Stock outstanding on the last
trading day of the immediately preceding calendar year. No Incentive Options may
be granted on the basis of the additional shares of Common Stock resulting from
such annual increases.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 300,000 shares of Common Stock per calendar year beginning with the
calendar year in which the Section 12(g) Registration Date occurs.
3.
<PAGE> 4
D. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation at the original issue price paid per share pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
E. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted options, separately exercisable stock appreciation rights and direct
stock issuances per calendar year, (iii) the number and/or class of securities
for which grants are subsequently to be made under the Automatic Option Grant
Program to new and continuing non-employee Board members, and (iv) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
4.
<PAGE> 5
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator and may be equal to, greater than or less than the Fair Market
Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable instructions
(A) to a Corporation-designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares
plus all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of such
exercise and (B) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be
exercisable at such time or times, during such period and for such number of
shares as shall be determined by the Plan
5.
<PAGE> 6
Administrator and set forth in the documents evidencing the option grant.
However, no option shall have a term in excess of ten (10) years measured from
the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Should the Optionee cease to remain in Service
for any reason other than Permanent Disability or Misconduct, then the
Optionee shall have a period of three (3) months following the date of
such cessation of Service during which to exercise each outstanding
option held by such Optionee.
(ii) Should the Optionee's Service terminate by
reason of Permanent Disability, then the Optionee shall have a period
of twelve (12) months following the date of such cessation of Service
during which to exercise each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an
outstanding option, then the personal representative of his or her
estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance shall have a
twelve (12)-month period following the date of the Optionee's death to
exercise such option.
(iv) Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option
term.
(v) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding with respect to any and all
option shares for which the option is not otherwise at the time
exercisable or in which the Optionee is not otherwise at that time
vested.
(vi) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
(vii) In the event of a Corporate Transaction or
Change in Control, the provisions of Section III of this Article Two
shall govern the
6.
<PAGE> 7
period for which outstanding options are to remain exercisable
following the Optionee's cessation of Service and shall supersede any
provisions to the contrary in this paragraph.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option
is to remain exercisable following the Optionee's cessation of Service
or death from the limited period otherwise in effect for that option to
such greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued
in Service.
D. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
E. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
F. UNVESTED SHARES. The Plan Administrator shall have the discretion to
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.
7.
<PAGE> 8
G. FIRST REFUSAL RIGHTS. Until the Section 12(g) Registration Date, the
Corporation shall have the right of first refusal with respect to any proposed
disposition by the Optionee (or any successor in interest) of any shares of
Common Stock issued under the Plan. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.
H. MARKET STAND-OFF. In connection with any underwritten public
offering by the Corporation of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, including the
Corporation's initial public offering, the Optionee may not sell, make any short
sale of, loan, hypothecate, pledge, grant any option for the purchase of, or
otherwise dispose or transfer for value or otherwise agree to engage in any of
the foregoing transactions with respect to, any shares of Common Stock acquired
upon exercise of an option granted under the Plan without the prior written
consent of the Corporation or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be requested by
the Corporation or such underwriters. The Optionee shall be required to execute
such agreements as the Corporation or the underwriters request in connection
with the Market Stand-Off.
I. FORFEITURE FOR COMPETITION. If, at any time while the Optionee
remains in Service or after the Optionee's termination of Service while the
option remains outstanding, the Optionee provides services to a competitor of
the Corporation (or any Parent or Subsidiary), whether as an employee, officer,
director, independent contractor, consultant, agent or otherwise, such services
being of a nature that can reasonably be expected to involve the skills and
experience used or developed by the Optionee while in the Corporation's Service,
then the Optionee's rights under any options outstanding under the Plan shall be
forfeited and terminated, subject to a determination to the contrary by the Plan
Administrator.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
the Plan shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. EXERCISE PRICE. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).
8.
<PAGE> 9
To the extent the Employee holds two (2) or more such options which become
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the option term shall not exceed five (5)
years measured from the option grant date and the exercise price per share of
the option shall be equal to at least one hundred ten percent (110%) of the Fair
Market Value per share of Common Stock on the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall NOT so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator, and its determination shall be final, binding
and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof).
D. If an outstanding option is assumed by the successor corporation (or
parent thereof) in connection with a Corporate Transaction, and the
Corporation's repurchase rights with respect to the unvested option shares are
assigned to such successor corporation (or parent thereof), and at the time of
or within twelve (12) months following such Corporate Transaction either (i) the
9.
<PAGE> 10
Optionee is offered a Lesser Position in replacement of the position held by him
or her immediately prior to the Corporate Transaction or (ii) the Optionee's
Service terminates by reason of an Involuntary Termination, then, effective as
of the date on which such Lesser Position is offered to the Optionee or the
effective date of such Involuntary Termination, respectively, the option shall
automatically accelerate in part so that, in addition to the number of vested
shares of Common Stock for which the option is exercisable at such time, the
option shall become exercisable with respect to the next annual installment of
option shares for which the option is scheduled to become exercisable in
accordance with the exercise schedule established for the option (and the
Corporation's repurchase rights shall automatically lapse with respect to such
option shares). Following such acceleration, to the extent the Optionee
continues in Service, the exercise schedule for the option shall be adjusted so
that the option shall become exercisable, with respect to each subsequent annual
installment of option shares under the original exercise schedule, on each
subsequent anniversary of the effective date of such option acceleration. In the
event that both the offer of a Lesser Position and a subsequent Involuntary
Termination of an Optionee's Service occur within twelve (12) months following a
Corporate Transaction, then acceleration of the option shares shall occur only
in connection with the offer of such Lesser Position and no additional
acceleration shall occur in connection with such subsequent Involuntary
Termination. Following an Involuntary Termination that occurs within twelve (12)
months following a Corporate Transaction, the option shall remain exercisable
for any or all of the vested option shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination.
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction, (ii) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same and (iii) the maximum number of securities
and/or class of securities for which any one person may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan.
F. Notwithstanding Sections III.A., III.B. and III.D of this Article
Two, the Plan Administrator shall have the discretion, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
(and the automatic termination of one or more outstanding repurchase rights with
the immediate vesting of the shares of Common Stock subject to those rights)
upon the occurrence of a Corporate Transaction, whether or not those options are
to be assumed or replaced (or those repurchase rights are to be assigned) in the
Corporate Transaction. The Plan Administrator shall also have the discretion to
grant options which do not accelerate whether or not such options are assumed
(and to provide for repurchase rights that do not terminate whether or not such
rights are assigned) in connection with a Corporate Transaction.
10.
<PAGE> 11
G. The Plan Administrator shall also have the discretion, exercisable
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration, of any options which are
assumed or replaced in a Corporate Transaction and do not otherwise accelerate
at that time (and the termination of any of the Corporation's outstanding
repurchase rights which do not otherwise terminate at the time of the Corporate
Transaction) in the event that within twelve (12) months following the effective
date of such Corporate Transaction either (i) the Optionee should be offered a
Lesser Position in replacement of the position held by him or her immediately
prior to the Corporate Transaction or (ii) the Optionee's Service should
subsequently terminate by reason of an Involuntary Termination. Following an
Involuntary Termination that occurs within twelve (12) months following a
Corporate Transaction, any options accelerated under this Section III. G shall
remain exercisable for the vested option shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination.
H. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the occurrence of either of the following events within
a specified period (not to exceed twelve (12) months) following the effective
date of such Change in Control: (a) the offer to the Optionee of a Lesser
Position in replacement of the position held by him or her immediately prior to
the Change in Control or (b) the Involuntary Termination of the Optionee's
Service. Any options accelerated in connection with a Change in Control shall
remain fully exercisable until the expiration or sooner termination of the
option term; provided, however, that following an Involuntary Termination that
occurs within twelve (12) months following a Change in Control, any options
accelerated under this Section III.H shall remain exercisable for the vested
option shares until the earlier of (i) the expiration of the option term or (ii)
the expiration of the one (1)-year period measured from the effective date of
the Involuntary Termination.
I. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
J. The grant of options under the Option Grant Program shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
11.
<PAGE> 12
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Plan and to grant
in substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to grant
to selected Optionee's tandem stock appreciation rights and/or limited stock
appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of
Common Stock and the surrender of that option in exchange for a
distribution from the Corporation in an amount equal to the excess of
(a) the Fair Market Value (on the option surrender date) of the number
of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be effective
unless it is approved by the Plan Administrator. If the surrender is so
approved, then the distribution to which the Optionee shall be entitled
may be made in shares of Common Stock valued at Fair Market Value on
the option surrender date, in cash, or partly in shares and partly in
cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
(iii) If the surrender of an option is rejected by
the Plan Administrator, then the Optionee shall retain whatever rights
the Optionee had under the surrendered option (or surrendered portion
thereof) on the option surrender date and may exercise such rights at
any time prior to the later of (a) five (5) business days after the
receipt of the rejection notice or (b) the last day on which the option
is otherwise exercisable in accordance with the terms of the documents
evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:
(i) One or more Section 16 Insiders may be granted
limited stock appreciation rights with respect to their outstanding
options.
12.
<PAGE> 13
(ii) Upon the occurrence of a Hostile Take-Over,
each such individual holding one or more options with such a limited
stock appreciation right shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile
Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of
Common Stock. In return for the surrendered option, the Optionee shall
receive a cash distribution from the Corporation in an amount equal to
the excess of (a) the Take-Over Price of the shares of Common Stock
which are at the time vested under each surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price
payable for such shares. Such cash distribution shall be paid within
five (5) days following the option surrender date.
(iii) The Plan Administrator shall pre-approve, at
the time the limited right is granted, the subsequent exercise of that
right in accordance with the terms of the grant and the provisions of
this Section V.C. No additional approval of the Plan Administrator or
the Board shall be required at the time of the actual option surrender
and cash distribution.
(iv) The balance of the option (if any) shall
continue in full force and effect in accordance with the documents
evidencing such option.
13.
<PAGE> 14
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by
the Plan Administrator and may be less than, equal to or greater than the Fair
Market Value per share of Common Stock on the issue date.
2. Subject to the provisions of Section I of Article
Four, shares of Common Stock may be issued under the Stock Issuance Program for
any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the
Corporation (or any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or
other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.
14.
<PAGE> 15
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
C. FIRST REFUSAL RIGHTS. Until the Section 12(g) Registration Date, the
Corporation shall have the right of first refusal with respect to any proposed
disposition by the Participant (or any successor in interest) of any shares of
Common Stock issued under the Stock Issuance Program. Such right of first
refusal shall be exercisable in accordance with the terms established by the
Plan Administrator and set forth in the document evidencing such right.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are assigned to the successor corporation (or parent thereof)
in connection with such Corporate Transaction or (ii) such accelerated vesting
is precluded by other limitations imposed in the Stock Issuance Agreement.
B. Notwithstanding Section II.A. of this Article Three, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation's
repurchase rights remain outstanding under the Stock Issuance Program, to
provide that those rights shall automatically terminate in whole or in part, and
the shares of Common Stock subject to those terminated rights shall immediately
vest, in the event
15.
<PAGE> 16
of a Corporate Transaction, whether or not those repurchase rights are to be
assigned to the successor corporation (or its parent) in connection with such
Corporate Transaction. The Plan Administrator shall also have the discretion to
provide for repurchase rights with terms different from those in effect under
this Section II in connection with a Corporate Transaction.
C. The Plan Administrator shall have the discretion, exercisable either
at the time the unvested shares are issued or at any time while the
Corporation's repurchase rights remain outstanding, to provide that any
repurchase rights that are assigned in the Corporate Transaction shall
automatically terminate, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event that either of
the following events should occur either at the time of or within a specified
period (not to exceed twelve (12) months) following the effective date of the
Corporate Transaction: (a) the Participant is offered a Lesser Position in
replacement of the position held by him or her immediately prior to the
Corporate Transaction or (b) the Participant's Service terminates by reason of
an Involuntary Termination.
D. The Plan Administrator shall have the discretion, exercisable either
at the time the unvested shares are issued or at any time while the
Corporation's repurchase right remains outstanding, to (i) provide for the
automatic termination of one or more outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those rights upon the
occurrence of a Change in Control or (ii) condition any such accelerated vesting
upon the occurrence of either of the following events at the time of or within a
specified period (not to exceed twelve (12) months) following the effective date
of such Change in Control: (a) the Participant is offered a Lesser Position in
replacement of the position held by him or her immediately prior to the Change
in Control or (b) the Involuntary Termination of the Participant's Service.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
IV. MARKET STAND-OFF
In connection with any underwritten public offering by the
Corporation of its equity securities pursuant to an effective registration
statement filed under the Securities Act of 1933, including the Corporation's
initial public offering, the Participant may not sell, make any short sale of,
loan, hypothecate, pledge, grant any option for the purchase of, or otherwise
dispose or transfer for value or otherwise agree to engage in any of the
foregoing transactions with respect to, any shares of Common Stock acquired
under the Plan without the prior written consent of the Corporation or its
underwriters. Such restriction (the "Market Stand-Off") shall be in effect for
such period of time from and after the effective date of the final prospectus
for the offering as may be requested by the Corporation or such underwriters.
The Participant shall be
16.
<PAGE> 17
required to execute such agreements as the Corporation or the underwriters
request in connection with the Market Stand-Off.
17.
<PAGE> 18
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates specified below:
1. Each individual who is first elected or appointed as a
non-employee Board member on or at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 50,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
2. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a
non-employee Board member, whether or not that individual is standing for
re-election to the Board, shall automatically be granted a Non-Statutory Option
to purchase 5,000 shares of Common Stock, provided such individual has served as
a non-employee Board member for at least six (6) months.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial 50,000-share option shall vest,
and the Corporation's repurchase right shall lapse, in a series of four (4)
successive equal annual installments upon the Optionee's completion of each year
of Board service over the four (4)-year period measured from the option grant
date. Each annual 5,000- share option shall vest, and the Corporation's
repurchase right shall lapse, in a series of two (2) successive equal annual
installments upon the Optionee's completion of each year of Board service over
the two (2)-year period measured from the option grant date.
18.
<PAGE> 19
E. CESSATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options outstanding at the time of the Optionee's
cessation of Board service:
(i) The Optionee (or, in the event of Optionee's
death, the personal representative of the Optionee's estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such
option.
(ii) During the twelve (12)-month exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of
those shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the
twelve (12)-month exercise period or (if earlier) upon the expiration
of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Board service for any reason other than death or Permanent
Disability, terminate and cease to be outstanding to the extent the
option is not otherwise at that time exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-
OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
19.
<PAGE> 20
B. In connection with any Change in Control, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Change in Control, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Each such option shall remain exercisable
for such fully-vested option shares until the expiration or sooner termination
of the option term or the surrender of the option in connection with a Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee
shall have a thirty (30)-day period in which to surrender to the Corporation
each of his or her outstanding automatic option grants. The Optionee shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the shares of Common Stock at
the time subject to each surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution shall be paid within five
(5) days following the surrender of the option to the Corporation.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
20.
<PAGE> 21
ARTICLE FIVE
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one or
more installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value, if
any, of those shares) plus (ii) any Federal, state and local income and
employment tax liability incurred by the Optionee or the Participant in
connection with the option exercise or share purchase.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or upon the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Taxes incurred by such holders in connection with the exercise of their
options or the vesting of their shares. Such right may be provided to any such
holder in either or both of the following formats:
(i) Stock Withholding: The election to have
the Corporation withhold, from the shares of Common Stock otherwise
issuable upon the exercise of such Non-Statutory Option or the vesting
of such shares, a portion of those shares with an aggregate Fair Market
Value equal to the percentage of the Taxes (not to exceed one hundred
percent (100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver
to the Corporation, at the time the Non-Statutory Option is exercised
or the shares vest, one or more shares of Common Stock previously
acquired by such holder (other than in connection with the option
exercise or share vesting triggering the Taxes) with an aggregate Fair
Market Value equal to the percentage of the Taxes (not to exceed one
hundred percent (100%)) designated by the holder.
21.
<PAGE> 22
III. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan became effective when adopted by the board of directors of
Internet Security Systems, Inc., a Georgia Corporation, (the "Predecessor
Corporation") on September 6, 1995 and was approved by the stockholders of the
Predecessor Corporation on January 31, 1996. Effective as of February 28, 1997,
the board of directors of the Predecessor Corporation restated, subject to
approval by the stockholders, the Plan to make the following changes: (i) to
re-name the Plan the "Restated 1995 Stock Incentive Plan", (ii) to increase the
number of shares of the Predecessor Corporation's common stock available for
issuance thereunder by 600,000 shares from 948,029 to 1,548,029 shares, (iii) to
add the Stock Issuance Program, (iv) to give the Plan Administrator additional
discretion to structure options as immediately exercisable options, subject to
repurchase at the option exercise price paid per share, (v) to give the Plan
Administrator additional discretion to provide for the accelerated vesting of
options or issued shares of Common Stock in connection with a Corporate
Transaction or Change in Control or upon either (a) the offer to an Optionee or
Participant of a Lesser Position or (b) the Involuntary Termination of an
Optionee or Participant's Service following such Corporate Transaction or Change
in Control and (vi) to incorporate certain features which would be appropriate
after the Section 12(g) Registration Date including, in particular the power to
grant stock appreciation rights, certain amendments to the administrative
provisions of the Plan to comply with applicable Federal securities and tax laws
and the imposition of a 300,000-share limit on the number of shares which may be
awarded to any individual under the Plan after the Section 12(g) Registration
Date, as required by Section 162(m) of the Code.
The provisions of the February 28, 1997 restatement of the Plan shall
apply only to options granted and stock issuances made under the Plan from and
after February 28, 1997. All options outstanding under the Plan at the time of
the February 28, 1997 restatement shall continue to be governed by the terms and
conditions of the Plan (and the respective instruments evidencing each such
option) as in effect on the date each such option was granted; provided,
however, that one or more provisions of the restated Plan, may, in the Plan
Administrator's discretion, be extended to one or more such options.
B. On December 3, 1997, in connection with incorporation of the
Corporation, the Plan was assumed by the Corporation and each option outstanding
thereunder was assumed by the Corporation and converted into an option to
purchase shares of the Corporation's Common Stock on a 1-for-1 basis, at the
original option exercise price per share and subject to the original terms and
conditions of each such option. Also on December 3, 1997, the Board, in
anticipation of the initial public offering of the Common Stock and subject to
approval by the Corporation's stockholders, further amended the Plan to (i)
render non-employee Board members and consultants and independent advisors
eligible to receive option grants under the Plan after the Section 12(g)
Registration Date, (ii) add the Automatic Option Grant Program, (iii) increase
the number of shares of Common Stock issuable under the Plan from 1,548,029 to
3,000,000 shares and (iv) provide for an automatic annual increase in the total
number of shares of Common Stock authorized for issuance under the Plan.
22.
<PAGE> 23
C. The Plan shall terminate upon the earliest of (i) September 6, 2005,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at that time under the Plan shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Discretionary Option Grant Program
and shares may be issued under the Stock Issuance Program which are in each
instance in excess of the number of shares of Common Stock then available for
issuance under the Plan, provided any excess shares actually issued under those
programs shall be held in escrow until there is obtained stockholder approval of
an amendment sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such stockholder approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VI. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock upon
the exercise of any options or upon the vesting of any shares issued under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
23.
<PAGE> 24
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any options under
the Plan and the issuance of any shares of Common Stock (i) upon the exercise of
any option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.
VIII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
24.
<PAGE> 25
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMITTEE shall mean a committee of one (1) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.
F. COMMON STOCK shall mean the Corporation's common stock.
G. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(a) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different
A-1.
<PAGE> 26
from the persons holding those securities immediately prior to such
transaction, or
(b) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
H. CORPORATION shall mean ISS Group, Inc., a Delaware corporation.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the option grant
program in effect under the Plan.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(a) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(b) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(c) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
A-2.
<PAGE> 27
(d) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the
Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
M. HOSTILE TAKE-OVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(a) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(b) such individual's voluntary resignation following the
offer to such individual of a Lesser Position in replacement of the
position held by him or her immediately prior to the Corporate
Transaction or Change in Control.
Q. LESSER POSITION for an Optionee or Participant shall mean a new
position or a change in the Optionee or Participant's position which, compared
with such individual's position with the Corporation immediately prior to the
Corporate Transaction or Change in Control, (i) offers a lower level of
compensation (including base salary, fringe benefits and target bonuses under
any corporate-performance based bonus or incentive programs), or (ii) materially
reduces such individual's duties or level of responsibility.
R. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
A-3.
<PAGE> 28
S. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
T. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
U. OPTIONEE shall mean any person to whom an option is granted under
the Plan.
V. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
X. PERMANENT DISABILITY or PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
Program, Permanent Disability or Permanently Disabled shall mean the inability
of the non-employee Board member to perform his or her usual duties as a Board
member by reason of any medically determinable physical or mental impairment
expected to result in death or to be of continuous duration of twelve (12)
months or more.
Y. PLAN shall mean the Corporation's Restated 1995 Stock Incentive
Plan, as set forth in this document.
Z. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Option Grant and Stock Issuance Programs with respect to one or
more classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the Option Grant
and Stock Issuance Programs with respect to Section 16 Insiders.
AB. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Option Grant and Stock Issuance
Programs with respect to eligible persons other than Section 16 Insiders.
AC. SECTION 12(G) REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) of the 1934 Act.
A-4.
<PAGE> 29
AD. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AE. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
AF. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
AG. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
AI. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
AJ. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
AK. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AL. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AM. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AN. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and the initial public offering price of the Common Stock
is established.
A-5.
<PAGE> 1
EXHIBIT 10.2
February 2, 1996
Greylock Equity Limited Partnership
755 Page Mill Road, A-100
Palo Alto, California 94304
Attn: David Strohm
Sigma Partners
2884 Sand Hill Road, Suite 121
Menlo Park, California 94025
Attn: Bob Davoli
Dear Sirs:
Internet Security Systems, Inc., a Georgia Corporation (the "Company"),
may at a future date elect to sell its Common Stock in a bona fide, firm
commitment underwriting pursuant to a registration statement filed under the
Securities Act of 1933 (an "IPO"). In the event that the Company consummates an
IPO, it may contract with an underwriter for certain persons designated by the
Company to be entitled to purchase from such underwriter shares of the Company's
Common Stock at the "IPO Price." The IPO Price means the public offering price
of the Company's Common Stock in its IPO. The shares so offered are designated
"Directed Shares." In the event that the Company, upon consummation of an IPO,
offers any Directed Shares to any person, the Company will use its best efforts
to cause the underwriters to allow each of Greylock Equity Limited Partnership
or their affiliates or designates and Sigma Partners or their affiliates or
designates (each a "Holder" and collectively, the "Holders") to purchase at a
price per share equal to the IPO Price, the lesser of (i) 100,000 Shares of the
Company's Common Stock to be sold in the IPO or, (ii) a number of Shares of
Common Stock equal to the total number of Directed Shares offered by the Company
multiplied by the Holder's percentage ownership of the Company's Common Stock on
an as converted basis before any shares are issued in the IPO. The proportion of
such Holder's ownership of Common Stock shall be deemed to include all
securities convertible into or exercisable for Common Stock, including Preferred
Stock, calculated as if such securities had converted into Common Stock at the
then applicable conversion ratio. The Holders acknowledge and agree that,
subject to the foregoing, the Company, acting
<PAGE> 2
Greylock Equity Limited Partnership
Sigma Partners
February 2, 1996
Page 2
through its Board of Directors shall have the sole and exclusive discretion to
determine those persons who shall receive Directed Shares. Notwithstanding the
foregoing, the Holders' rights hereunder shall be limited to the extent required
by applicable law or rules of the SEC, the National Association of Securities
Dealers, Inc. or any exchange upon which the shares sold in the IPO may be
traded.
Very truly yours,
INTERNET SECURITY SYSTEMS, INC.
By:
----------------------------
Title:
-------------------------
Agreed and accepted:
GREYLOCK EQUITY LIMITED PARTNERSHIP
By: Greylock Equity GP Limited Partnership,
Its General Partner
By:
---------------------------------------
SIGMA PARTNERS
By:
---------------------------------------
Title:
-------------------------------------
-2-
<PAGE> 3
February 14, 1997
AT & T Venture Fund II, L.P.
Venture Fund I, L.P.
Chevy Chase Metro Building
2 Wisconsin Circle, Suite 610
Chevy Chase, Maryland 20815
Attn: Jim Pastoriza
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, California 94025
Attn: Ted Schlein
Dear Sirs:
Internet Security Systems, Inc., a Georgia Corporation (the "Company"),
may at a future date elect to sell its Common Stock in a bona fide, firm
commitment underwriting pursuant to a registration statement filed under the
Securities Act of 1933 (an "IPO"). In the event that the Company consummates an
IPO, it may contract with an underwriter for certain persons designated by the
Company to be entitled to purchase from such underwriter shares of the Company's
Common Stock at the "IPO Price." The IPO Price means the public offering price
of the Company's Common Stock in its IPO. The shares so offered are designated
"Directed Shares." In the event that the Company, upon consummation of an IPO,
offers any Directed Shares to any person, the Company will use its best efforts
to cause the underwriters to allow each of AT & T Ventures or their affiliates
or designates and Kleiner Perkins Caufield & Byers or their affiliates or
designates (each a "Holder" and collectively, the "Holders") to purchase at a
price per share equal to the IPO Price, the lesser of (i) 100,000 Shares of the
Company's Common Stock to be sold in the IPO or, (ii) a number of Shares of
Common Stock equal to the total number of Directed Shares offered by the Company
multiplied by the Holder's percentage ownership of the Company's Common Stock on
an as converted basis before any shares are issued in the IPO. The proportion of
such Holder's ownership of Common Stock shall be deemed to include all
securities convertible into or exercisable for Common Stock, including Preferred
Stock, calculated as if such securities had converted into Common Stock at the
then applicable conversion ratio. The Holders acknowledge and agree that,
subject to the foregoing, the Company, acting
-1-
<PAGE> 4
AT & T Ventures
Kleiner Perkins Caufield & Byers
February 14, 1997
Page 2
through its Board of Directors shall have the sole and exclusive discretion to
determine those persons who shall receive Directed Shares. Notwithstanding the
foregoing, AT&T Ventures the Holders' rights hereunder shall be limited to the
extent required by applicable law or rules of the SEC, the National Association
of Securities Dealers, Inc. or any exchange upon which the shares sold in the
IPO may be traded.
Very truly yours,
INTERNET SECURITY SYSTEMS, INC.
By:
----------------------------
Title:
-------------------------
Agreed and accepted:
AT & T VENTURE FUND II, L.P.
By:
------------------------------
Name:
Title:
VENTURE FUND I, L.P.
By:
------------------------------
Name:
Title:
KLEINER PERKINS CAUFIELD & BYERS
By:
------------------------------
Name:
Title:
-2-
<PAGE> 1
EXHIBIT 10.3
-----------------------------------------
INTERNET SECURITY SYSTEMS, INC.
AMENDED AND RESTATED
RIGHTS AGREEMENT
FEBRUARY 14, 1997
-----------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 1 - Certain Definitions............................................... -1-
Section 2 - Piggyback Rights.................................................. -2-
2.1 Notice of Registration...................................... -2-
2.2 Underwriting................................................ -3-
2.3 Right to Terminate Registration............................. -3-
Section 3 - Demand Registration............................................... -4-
3.1 Demand Registration......................................... -4-
3.2 Underwritten Public Offering................................ -5-
3.3 Rights of Key Management Holders............................ -5-
3.4 Inclusion of Additional Shares.............................. -5-
3.5 Termination of Demand Rights................................ -6-
Section 4 - Form S-3 Registration............................................. -6-
4.1 Registrations on Form S-3................................... -6-
Section 5 - Obligations of Company............................................ -7-
Section 6 - Expenses of Registration.......................................... -8-
Section 7 - Indemnification................................................... -8-
7.1 The Company................................................. -8-
7.2 Holders..................................................... -9-
7.3 Key Management Holders...................................... -9-
7.4 Defense of Claims........................................... -10-
Section 8 - Rule 144 Reporting................................................ -10-
Section 9 - Standoff Agreement................................................ -11-
Section 10 - Limitations on Subsequent Registration Rights.................... -11-
Section 11 - Information Rights............................................... -12-
11.1 Delivery of Financial Statements............................ -12-
11.2 Inspection.................................................. -12-
11.3 Termination of Information and Inspection Covenants......... -12-
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 12 - Additional Covenants............................................. -13-
12.1 Confidentiality............................................. -13-
12.2 Independent Accountants..................................... -13-
12.3 Internal Revenue Codess.1202................................ -13-
Section 13 - Termination of Rights............................................ -14-
Section 14 - Miscellaneous.................................................... -14-
14.1 Assignment.................................................. -14-
14.2 Governing Law............................................... -14-
14.3 Counterparts................................................ -14-
14.4 Titles and Subtitles........................................ -14-
14.5 Notices..................................................... -14-
14.6 Attorney's Fees............................................. -15-
14.7 Amendments and Waivers...................................... -15-
14.8 Severability................................................ -15-
14.9 Delays or Omissions......................................... -15-
14.10 Entire Agreement............................................ -16-
</TABLE>
-ii-
<PAGE> 4
AMENDED AND RESTATED RIGHTS AGREEMENT
THIS AMENDED AND RESTATED RIGHTS AGREEMENT (the "AGREEMENT") is
entered into as of February 14, 1997, by and among Internet Security Systems,
Inc., a Georgia corporation (the "COMPANY"), and those shareholders of the
Company listed on Exhibit A hereto (the "Key Management Holders") and the
purchasers listed on the signature page hereof (each a "PREFERRED HOLDER" and
together the "PREFERRED HOLDERS").
RECITALS
A. The Company, Greylock Equity Limited Partnership, Sigma Associates
III, L.P., Sigma Investors III, L.P., Sigma Partners III, L.P. and John P. Imlay
desire to amend and restate that certain Rights Agreement dated as of February
2, 1996 and as amended February 15, 1996, by and among them (the "Prior
Agreement") and allow Kleiner Perkins Caufield & Byers, AT & T Ventures and the
Key Management Holders to become a party to the amended and restated agreement.
B. The Preferred Holders have purchased or will purchase shares of
Series A Preferred Stock and Series B Preferred Stock (the "PREFERRED STOCK");
all or certain of which shares of Series B Preferred Stock are being purchased
pursuant to the terms of a Series B Preferred Stock Purchase Agreement dated of
even date herewith (the "PURCHASE AGREEMENT").
C. The execution of this Agreement is a condition to the closing of the
transactions contemplated by the Purchase Agreement.
D. The Company desires to enter into this Agreement and grant the
Preferred Holders the rights contained herein in order to fulfill such
condition.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties amend and restate the Prior Agreement in its
entirety and agree as follows:
SECTION 1
CERTAIN DEFINITIONS
Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
1.1 "EMPLOYEE REGISTRABLE SECURITIES" means (i) the shares of the
Common Stock of the Company held by the Key Management Holders and (ii) any
other shares of the Common Stock of the Company issued as a dividend or other
distribution with respect to such shares.
-1-
<PAGE> 5
1.2 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder, all as
the same shall be in effect at that time.
1.3 "INITIAL PUBLIC OFFERING" or "IPO" means the Company's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act.
1.4 The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (as defined below), and the declaration or
ordering of the effectiveness of such registration statement.
1.5 "REGISTRABLE SECURITIES" means (i) the shares of Common Stock of
the Company issuable or issued upon conversion of the Preferred Stock of the
Company (the "SHARES"), and (ii) any other shares of the Company's Common Stock
issued as (or issuable upon conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to or exchange for or replacement of the Shares, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in which a
Preferred Holder's rights under this Agreement are not assigned; provided,
however, that Registrable Securities shall only be treated as Registrable
Securities if and so long as, they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction or (B) sold in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act under Section 4(1)
thereof so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation of such sale.
1.6 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC promulgated thereunder, all as the same
shall be in effect at the time.
1.7 "SEC" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
SECTION 2
PIGGYBACK RIGHTS
2.1 Notice of Registration. If at any time or from time to time, the
Company shall determine to register any of its securities for its own account in
an underwritten public offering, the Company will:
(i) promptly give to the Preferred Holders and Key Management
Holders written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and underwriting, all
the Registrable Securities and Employee
-2-
<PAGE> 6
Registrable Securities (subject to cutback as set forth in Section 2.2)
specified in a written request or requests made within thirty (30) days after
receipt of such written notice from the Company by any Preferred Holder or Key
Management Holder.
2.2 Underwriting. The right of any Preferred Holder or Key Management
Holder to registration pursuant to this Section 2 shall be conditioned upon such
Preferred Holder's or Key Management Holder's participation in such underwriting
and the inclusion of Registrable Securities or Employee Registrable Securities
in the underwriting to the extent provided herein. If any Preferred Holder or
Key Management Holder proposes to distribute its securities through such
underwriting, such Preferred Holder or Key Management Holder shall (together
with the Company and any other holders distributing their securities through
such underwriting) enter into an underwriting agreement in customary form with
the managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 2, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit to 40% the
Registrable Securities and may limit or exclude the Employee Registerable
Securities to be included in such registration (except with respect to the
Company's IPO, in which case all Registrable Securities may be excluded). The
Company shall so advise the Preferred Holders and Key Management Holders and the
other holders distributing their securities through such underwriting pursuant
to piggyback registration rights similar to this Section 2, and the number of
shares of Registrable Securities and Employee Registrable Securities and other
securities that may be included in the registration and underwriting shall be
allocated among the Preferred Holders and Key Management Holders in proportion,
as nearly as practicable, to the respective amounts of Registrable Securities
and Employee Registrable Securities held by such Preferred Holders and Key
Management Holders at the time of filing the registration statement; provided,
however, that no person who is not a Preferred Holder under this Agreement shall
be granted registration rights or be entitled to have shares included in such
underwriting unless all of the Registrable Securities which the Preferred
Holders have requested to be included in such underwriting have been so
included. If any Preferred Holder or Key Management Holder disapproves of the
terms of any such underwriting, he or she may elect to withdraw therefrom by
written notice to the Company and the managing underwriter, and such Preferred
Holder or Key Management Holder shall be deemed to have withdrawn if such
Preferred Holder or Key Management Holder fails to execute underwriting
documents requested by the managing underwriter within the time period requested
for execution of such documents. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to one hundred eighty (180) days
after the effective date of the registration statement relating thereto.
2.3 Right to Terminate Registration. The Company shall have the right
to terminate or withdraw any registration initiated by it under this Section 2
prior to the effectiveness of such registration, whether or not any Preferred
Holder or Key Management Holder has elected to include securities in such
registration.
-3-
<PAGE> 7
SECTION 3
DEMAND REGISTRATION
3.1 Demand Registration. During the period commencing six (6) months
after the Company's Initial Public Offering and until this Agreement terminates,
Preferred Holders shall be entitled to have the Company effect two (2) demand
registrations of Registrable Securities then owned by such Preferred Holders
requesting such registration. A request for such registration (a "REGISTRATION
REQUEST") must be made in writing and must be made by the holders of at least
thirty percent (30%) of the Common Stock issued or issuable upon the conversion
of the then outstanding Preferred Stock, which stock must have an offering value
of at least $2,500,000. The Company shall use its best efforts to cause the
Registrable Securities specified in such Registration Request to be registered
as soon as reasonably practicable so as to permit the sale thereof, and in
connection therewith shall prepare and file a registration statement with the
SEC under the Securities Act to effect such registration. Such registration
statement shall contain such required information pursuant to the rules and
regulations promulgated under the Securities Act and such additional information
as deemed necessary by the managing underwriter or if there is no managing
underwriter, as deemed necessary by mutual agreement between the Preferred
Holders requesting registration and the Company. Such Registration Request shall
(i) specify the number of shares intended to be offered and sold; (ii) express
the present intention of the requesting Preferred Holders to offer or cause the
offering of such shares for distribution; (iii) describe the nature or method of
the proposed offer and sale thereof; and (iv) contain the undertaking of the
requesting Preferred Holders to provide all such information and materials and
take all such action as may be required in order to permit the Company to comply
with all applicable requirements of the SEC and to obtain any desired
acceleration of the effective date of such registration statement.
Notwithstanding the foregoing, if the Company shall furnish to the requesting
Preferred Holders a certificate signed by a duly authorized officer of the
Company stating that in the good faith judgment of the Board of Directors of the
Company it would be seriously detrimental to the Company for such registration
statement to be filed on or before the date filing would be required, then the
Company shall be entitled to postpone filing of the registration statement for
up to one hundred twenty (120) days; provided, however, that the Company shall
be entitled to issue such a certificate only one (1) time in any given 12 month
period. If a registration has become effective but is withdrawn before
completion of the offering contemplated thereby because of adverse business
developments at the Company that were not known to the requesting Preferred
Holders when they requested that the Company initiate such registration
proceedings, such registration shall not count as one of the two registrations
referred to in the first sentence of this Section. If a registration is filed on
behalf of Preferred Holders and such registration is withdrawn at the request of
the Preferred Holders of at least fifty percent (50%) of the Registrable
Securities requesting registration for any reason other than adverse business
developments at the Company that were not known to the requesting Preferred
Holders, such registration will count as one of the two registrations referred
to in the first sentence of this section.
3.2 Underwritten Public Offering. If requested, and provided that the
underwriter or underwriters are of recognized national standing and reasonably
satisfactory to the Company, the Company shall enter into an underwriting
agreement with such underwriters containing
-4-
<PAGE> 8
representations, warranties, indemnities and agreements then customarily
included by an issuer in underwriting agreements with respect to secondary
distributions. The Company shall not cause the registration under the Securities
Act of any other shares of its Common Stock to become effective (other than
registration of an employee stock plan, or registration in connection with any
Rule 145 or similar transaction) during the effectiveness of a registration
requested hereunder for an underwritten public offering if, in the judgment of
the underwriter or underwriters, marketing factors would adversely affect the
price of the Registrable Securities subject to such underwritten registration.
3.3 Rights of Key Management Holders. If the Preferred Holders shall
cause the Company to effect a demand registration pursuant to this Section 3,
then the Key Management Holders may request in writing that all or part of the
Employee Registrable Securities held thereby be included in such demand
registration. The right of any Key Management Holder to registration pursuant to
this Section 3.3 shall be conditioned upon such Key Management Holder's
participation in such underwriting and the inclusion of the Employee Registrable
Securities in the underwriting to the extent provided herein. If any Key
Management Holder proposes to distribute its securities through such
underwriting, such key Management Holder shall (together with the Preferred
Holders, the Company and any other holders distributing their securities through
such underwriting) enter into an underwriting agreement in customary form with
the managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 3, if the managing
underwriter and the Board of Directors of the Company determine that marketing
factors require a limitation of the number of shares to be underwritten, the
managing underwriter may limit or exclude the Employee Registrable Securities to
be included in such registration. The Company shall so advise the Key Management
Holder, and the number of shares of Employee Registrable Securities that may be
included in the registration and underwriting shall be allocated among the Key
Management Holder and any other participating Key Management Holders in
proportion, as nearly as practicable, to the respective amounts of Employee
Registrable Securities held by such Key Management Holder and other securities
held by other Key Management Holders at the time of filing the registration
statement; provided, however, that the Employee Registrable Securities held by
all such Key Management Holders shall be subordinate to all Registrable
Securities held by the Preferred Holders and shall be excluded from such
registration prior to the exclusion of any Registrable Securities held by the
Preferred Holders.
3.4 Inclusion of Additional Shares. The Company may include in a
registration pursuant to this Section 3 securities for its own account and by
other third parties, in amounts as determined by the Company's Board of
Directors. To the extent the Company includes securities for its own account or
held by other parties in such registration statement, the Company shall take all
actions it deems necessary or advisable in order to ensure that security holders
of the Company, whether or not holding contractual registration rights, shall
not have the right to exclude from any registration initiated pursuant to this
Section 3 any Registrable Securities or Employee Registrable Securities with
respect to which any Preferred Holder or Key Management Holder, as the case may
be, has requested registration. If requested, and provided the underwriter or
underwriters are reasonably satisfactory to the Company, the Company shall
(together with all
-5-
<PAGE> 9
officers, directors and other third parties proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 3.4, if the representative advises the stockholders registering shares
of Common Stock in writing that marketing factors require a limitation on the
number of shares to be underwritten, the securities of the Company, securities
held by officers or directors of the Company (excluding such Registrable
Securities or Employee Registrable Securities held by any Preferred Holder or
Key Management Holder, as the case may be, subject to such registration) and the
securities held by other third parties shall be excluded from the underwriting
by reason of the underwriter's marketing limitation to the extent so required by
such limitation. No securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. If
any officer, director or other stockholder (including Preferred Holders and Key
Management Holders) who has requested inclusion in such registration as provided
above disapproves of the terms of the underwriting, such person may elect to
withdraw therefrom by written notice to the Company, the underwriter and the
Preferred Holders and Key Management Holders requesting registration.
3.5 Termination of Demand Rights. The rights of any Preferred Holder
and Key Management Holder to receive notice and to participate in a registration
pursuant to the terms of this Section 3 shall terminate at such time as (i) such
Preferred Holder or Key Management Holder could sell all of Registrable
Securities or Employee Registrable Securities held by such Preferred Holder or
Key Management Holder in any one three-month period under the terms of Rule
144(k) under the Securities Act and (ii) the Company has consummated an Initial
Public Offering.
SECTION 4
FORM S-3 REGISTRATION
4.1 Registrations on Form S-3. Preferred Holders shall be entitled to
request an unlimited number of registrations of Registrable Securities then
owned by such requesting Preferred Holder on a Form S-3 registration statement
under the Securities Act (a "SHELF REGISTRATION"); provided, however, that no
more than one (1) such registration shall be effected in any twelve (12) month
period (an "S-3 REGISTRATION REQUEST"). The S-3 Registration Request must be
made in writing and the S-3 Registration Request shall (i) specify the number of
shares intended to be offered and sold; (ii) express the present intention of
the requesting Preferred Holders to offer or cause the offering of such shares
for distribution; (iii) describe the nature or method of the proposed offer and
sale thereof and (iv) contain the undertaking of the requesting Preferred
Holders to provide all such information and materials and take all such action
as may be required in order to permit the Company to comply with all applicable
requirements of the SEC and to obtain any desired acceleration of the effective
date of such registration statement. The Company shall, as soon as practicable,
file a Shelf Registration and proceed to obtain all such qualifications and
compliance as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of the requesting Preferred Holder's
Registrable
-6-
<PAGE> 10
Securities as are specified in the S-3 Registration Request, within 30 days
after receipt of such written notice by the Company; provided, however, that the
Company shall not be obligated to effect any such registration, qualification or
compliance, pursuant to this Section 4 if (i) Form S-3 is not available for such
offering by the requesting Preferred Holders; (ii) the requesting Preferred
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) at an aggregate gross price to the
public of less than $2,000,000; (iii) the Company shall furnish to Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Shelf Registration to
be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than one hundred twenty (120) days after receipt of the request of any Preferred
Holder under this Section 4; provided, however, that the Company shall not
utilize this right more than once in any twelve (12) month period; or (iv) the
Company has, within the twelve (12) month period preceding the date of such
request, already effected a registration on Form S-3 for any Preferred Holder
pursuant to this Section 4.
SECTION 5
OBLIGATIONS OF COMPANY
Whenever the Company is required by the provisions of this Agreement to
use its best efforts to effect the registration of the Registrable Securities or
Employee Registrable Securities, the Company shall (i) prepare and, as soon as
possible, file with the SEC a registration statement with respect to the
Registrable Securities or Employee Registrable Securities, and use its best
efforts to cause such registration statement to become effective and to remain
effective until the earlier of the sale of the Registrable Securities or
Employee Registrable Securities so registered or ninety (90) days subsequent to
the effective date of such registration; (ii) prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to make and to keep such
registration statement effective and to comply with the provisions of the
Securities Act with respect to the sale or other disposition of all securities
proposed to be registered in such registration statement until the earlier of
the sale of the Registrable Securities or Employee Registrable Securities so
registered or ninety (90) days subsequent to the effective date of such
registration statement, (iii) furnish to any Preferred Holder or Key Management
Holder such number of copies of any prospectus (including any preliminary
prospectus and any amended or supplemented prospectus), in conformity with the
requirement of the Securities Act, as such Preferred Holder or Key Management
Holder may reasonably request in order to effect the offering and sale of the
Registrable Securities or Employee Registrable Securities to be offered and
sold, but only while the Company shall be required under the provisions hereof
to cause the registration statement to remain current; (iv) use its commercially
reasonable efforts to register or qualify the Registrable Securities or Employee
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such states as the Preferred Holder or Key
Management Holder shall reasonably request, maintain any such registration or
qualification current until the earlier of the sale of the
-7-
<PAGE> 11
Registrable Securities or Employee Registrable Securities so registered or
ninety (90) days subsequent to the effective date of the registration statement,
and take any and all other actions either necessary or advisable to enable
Preferred Holders or Key Management Holders to consummate the public sale or
other disposition of the Registrable Securities or Employee Registrable
Securities in jurisdictions where such Preferred Holders or Key Management
Holders desire to effect such sales or other disposition; and (v) take all such
other actions either necessary or desirable to permit the Registrable Securities
or Employee Registrable Securities held by a Preferred Holder or Key Management
Holder to be registered and disposed of in accordance with the method of
disposition described herein.
SECTION 6
EXPENSES OF REGISTRATION
The Company shall pay all of the reasonable out-of-pocket expenses
incurred in connection with any registration statements that are initiated
pursuant to this Agreement, including, without limitation, all SEC and blue sky
registration and filing fees, printing expenses, transfer agent and registrar
fees, the fees and disbursements of the Company's outside counsel and
independent accountants including expenses incurred in connection with any
special audits incidental to or required by such registration. The Company shall
also be required to pay the expenses of one special counsel to represent all
Preferred Holders and Key Management Holders to be selected by a majority of the
Preferred Holders and Key Management Holders participating in the Registration.
Any underwriting discounts, fees and disbursements of counsel to the Preferred
Holders and the Key Management Holders, selling commissions and stock transfer
taxes applicable to the Registrable Securities registered on behalf of Preferred
Holders and Key Management Holders shall be borne by holder of the Registrable
Securities or Employee Registrable Securities included in such registration.
SECTION 7
INDEMNIFICATION
7.1 The Company. The Company will indemnify the Preferred Holders and
Key Management Holders and each person controlling the Preferred Holders and Key
Management Holders within the meaning of Section 15 of the Securities Act, and
each underwriter if any, of the Company's securities, with respect to any
registration, qualification or compliance which has been effected pursuant to
this Agreement, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation
-8-
<PAGE> 12
by the Company of any rule or regulation promulgated under the Securities Act
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse the Preferred
Holders and Key Management Holders and each person controlling the Preferred
Holders and Key Management Holders, and each underwriter, if any, for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission or alleged untrue statement or omission, made
in reliance upon and in conformity with written information furnished to the
Company by such Preferred Holder or Key Management Holder or controlling person
or underwriter seeking indemnification.
7.2 Holders. Each Preferred Holder will, if Registrable Securities held
by such Preferred Holder are included in the securities as to which such
registration, qualification or compliance is being effected (the "INDEMNIFYING
HOLDER"), indemnify the Company, each of its directors and officers, each Key
Management Holder and each underwriter, if any, of the Company's securities
covered by such registration statement and each person who controls the Company
or a Key Management Holder within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such directors, officers or control persons, Key Management Holders or
underwriters for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Indemnifying Holder, provided that in no event
shall any indemnity under this Section 7.2 exceed the gross proceeds of the
offering received by such Indemnifying Holder.
7.3 Key Management Holders. Each Key Management Holder will, if
Employee Registrable Securities held by such Key Management Holder are included
in the securities as to which such registration, qualification or compliance is
being effected (the "EMPLOYEE INDEMNIFYING HOLDER"), indemnify the Company, each
of its directors and officers, each Preferred Holder and each underwriter, if
any, of the Company's securities covered by such registration statement and each
person who controls the Company within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such directors, officers, control persons, Preferred Holders or
underwriters for any
-9-
<PAGE> 13
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Employee
Indemnifying Holder, provided that in no event shall any indemnity under this
Section 7.3 exceed the gross proceeds of the offering received by such Employee
Indemnifying Holder.
7.4 Defense of Claims. Each party entitled to indemnification under
this Section 7 (the "INDEMNIFIED PARTY") shall give notice to the party required
to provide indemnification (the "INDEMNIFYING PARTY") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall pay such expense if representation of the Indemnified Party by counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding, and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Section 7 unless
the failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense of
any such claim or litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnifying Party shall be required to
indemnify any Indemnified Party with respect to any settlement entered into
without such Indemnifying Party's prior consent.
SECTION 8
RULE 144 REPORTING
With a view to making available the benefits of certain rules and
regulations of the SEC which may at any time permit the sale of the Registrable
Securities to the public without registration, the Company agrees to use its
best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after ninety (90) days following the effective date of the IPO;
(b) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
-10-
<PAGE> 14
(c) So long as a Preferred Holder owns any Registrable Securities,
furnish to such Preferred Holder forthwith upon request a written statement by
the Company as to its compliance with the reporting requirements of said Rule
144 (at any time from and after ninety (90) days following the effective date of
the first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents of the Company, and such other reports and documents
so filed as a Preferred Holder may reasonably request in availing itself of any
rule or regulation of the SEC allowing such Preferred Holder to sell any such
securities without registration.
SECTION 9
STANDOFF AGREEMENT
In connection with the Company's Initial Public Offering, if requested
by the Company and the managing underwriter, each Preferred Holder and Key
Management Holder agrees that such Preferred Holder or Key Management Holder
will not, directly or indirectly, sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any Common Stock of the
Company (other than those included in the Initial Public Offering, if any)
without the prior written consent of the Company or the underwriters for such
period of time (not to exceed one hundred and eighty (180) days) as may be
requested by the Company and the managing underwriter, provided that all
executive officers and directors of the Company enter into similar agreements.
SECTION 10
LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS
From and after the date of this Agreement, the Company shall not,
without the prior written consent of Preferred Holder(s) of at least a majority
of the outstanding Registrable Securities, enter into any agreement with any
holder or prospective holder of any securities of the Company giving such holder
or prospective holder any registration rights the terms of which are more
favorable than the registration rights granted to Preferred Holders hereunder or
to require the Company to effect a registration earlier than the date on which
Preferred Holders can first require a registration under Section 3.1.
-11-
<PAGE> 15
SECTION 11
INFORMATION RIGHTS
11.1 Delivery of Financial Statements.
(a) The Company shall deliver to each Preferred Holder, as
soon as practicable, but in any event within ninety (90) days after the end of
each fiscal year of the Company, an income statement for such fiscal year, a
balance sheet of the Company as of the end of such year, and a schedule as to
the sources and applications of funds for such year, such year-end financial
reports to be in reasonable detail, prepared in accordance with generally
accepted accounting principles, and audited and certified by independent public
accountants of nationally recognized standing selected by the Company.
(b) The Company shall deliver to each Preferred Holder:
(i) within thirty (30) days after the end of each month
and forty-five (45) days after the end of each quarter, an unaudited income
statement and schedule as to the sources and applications of funds and balance
sheet and comparison to budget for and as of the end of such month or quarter,
as the case may be, in reasonable detail;
(ii) as soon as practicable, but in any event thirty (30)
days prior to the end of each fiscal year, a budget and business plan for the
next fiscal year, prepared on a monthly basis, including balance sheets and
sources and applications of funds statements for such months and, as soon as
prepared, any other budgets or revised budgets prepared by the Company; and
(iii) such other information relating to the financial
conditions, business, prospects or corporate affairs of the Company as each
Preferred Holder; or any assignee of such Preferred Holder may from time to time
request; provided, however, that the Company shall not be obligated to provide
information which it deems in good faith to be proprietary.
11.2 Inspection. The Company shall permit each Preferred Holder, at
such Preferred Holder's expense, to visit and inspect the Company's properties,
to examine its books of account and records and to discuss the Company's
affairs, finances and accounts with its officers, all at such reasonable times
as may be requested by such Preferred Holder; provided, however, that the
Company shall not be obligated pursuant to this Section 11.2 to provide access
to any information which it reasonably considers to be a trade secret or similar
confidential information.
11.3 Termination of Information and Inspection Covenants. The covenants
set forth in Sections 11.1 and 11.2 shall terminate as to each Preferred Holder
and be of no further force or effect immediately upon the consummation of an
Initial Public Offering.
-12-
<PAGE> 16
SECTION 12
ADDITIONAL COVENANTS
12.1 Confidentiality. Each of the Preferred Holders agrees to keep
confidential and not to disclose to persons other than its employees,
professional consultants and advisors any information concerning the Company
which is confidential or proprietary ("CONFIDENTIAL INFORMATION"), except as
otherwise required by law. No Confidential Information shall be used or
disclosed by a Preferred Holder for any purpose except in connection with the
transactions contemplated by the Purchase Agreement and the agreements executed
and delivered in connection with the Purchase Agreement and in the enforcement
of its rights thereunder. Each Preferred Holder shall use the same level of care
with the Confidential Information as it uses with its own confidential
information. Notwithstanding the foregoing, the restrictions set forth in this
Section 12.1 shall not be applicable to any information that is publicly
available, any information independently developed by a Preferred Holder or its
professional consultants, any information known to a Preferred Holder or its
professional consultants before the disclosure thereof by the Company, or any
information disclosed to a Preferred Holder by a person without any
confidentiality duty to the Company.
12.2 Independent Accountants. Until the consummation of the Company's
Initial Public Offering, the Company will retain independent public accountants
of recognized national standing who shall certify the Company's financial
statements at the end of each fiscal year. In the event the services of the
independent public accountants so selected, or any firm of independent public
accountants hereafter employed by the Company, are terminated, the Company will
promptly thereafter engage another firm of independent public accountants of
recognized national standing.
12.3 Internal Revenue Code ss.1202. The Company shall furnish to each
Preferred Holder, and shall use reasonable commercial efforts to make such
filings with the Internal Revenue Service, as shall from time to time be
required pursuant to Section 1202(d)(1) of the Code. In addition, the Company
agrees that it will not make any purchases of its stock within the meaning of
and which would exceed the limitation contained in Section 1202(c)(3)(B) of the
Code with respect to the Preferred Stock, unless such purchases have been
consented to by holders a majority of the Preferred Stock or are required by
contractual obligations entered into prior to the Closing. Any such information
provided to the Preferred Holders under this Section 12.3 shall not be disclosed
by any Preferred Holder to any party except as required and solely in order for
such Preferred Holder to claim any benefits under Section 1202 of the Code.
SECTION 13
TERMINATION OF RIGHTS
Unless otherwise specified herein, this Agreement shall terminate on
the fifth (5th) anniversary of the date of the Company's Initial Public
Offering. Upon termination, no party shall have any further obligation or
liability hereunder.
-13-
<PAGE> 17
SECTION 14
MISCELLANEOUS
14.1 Assignment. The rights to cause the Company to register securities
granted to the Preferred Holders or Key Management Holders by the Company under
this Agreement may be transferred or assigned by the Preferred Holders or Key
Management Holders; provided that the Company is given written notice at the
time of or within a reasonable time after said transfer or assignment, stating
the name and address of the transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned, and, provided further, that the transferee or assignee of such
rights assumes the obligations of such Preferred Holder under this Agreement.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Any transferee or assignee shall thereafter be treated as a
Preferred Holder or Key Management Holder, subject to the limitations herein.
Until the Company receives actual notice of any transfer or assignment, it shall
be entitled to rely on the then existing list of Preferred Holders and Key
Management Holders and the failure to notify the Company of any transfer or
assignment shall not affect the validity of a notice properly given by the
Company to the Preferred Holders and Key Management Holders pursuant to lists
maintained by the Company.
14.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements entered into
solely between residents of and to be performed entirely within, such state.
14.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
14.5 Notices.
(a) All notices, requests, demands and other communications
under this Agreement or in connection herewith shall be given to or made upon
the Preferred Holder at the addresses set forth in the Company's records with a
copy to Wilson, Sonsini, Goodrich & Rosati, P.C. at 650 Page Mill Road, Palo
Alto, California 94304, attention: Steven E. Bochner, and, if to the Company,
to: Internet Security Systems, Inc., 41 Perimeter Center East, Suite 660,
Atlanta, Georgia 30346, with a copy to Brobeck, Phleger & Harrison LLP, 301
Congress Avenue, Suite 1200, Austin, Texas 78701, attention: Carmelo M. Gordian.
(b) All notices, requests, demands and other communications
given or made in accordance with the provisions of this Agreement shall be in
writing, and shall be sent by airmail, return receipt requested, or by facsimile
with confirmation of receipt, and shall be deemed to be given or made when
receipt is so confirmed.
-14-
<PAGE> 18
(c) Any party may, by written notice to the other, alter its
address or respondent, and such notice shall be considered to have been given
three (3) days after the airmailing or faxing thereof.
14.6 Attorney's Fees. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorney's fees costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
14.7 Amendments and Waivers. Any term of this Agreement may be amended
with the written consent of the Company and the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the outstanding Registrable Securities;
provided, however, that the holders of at least fifty-one percent (51%) of the
Employee Registrable Securities held by Key Management Holders who are still
employed by the Company is required if the registration rights of such Key
Management Holders will be materially and adversely affected by such amendment.
Any amendment or waiver effected in accordance with this Section 14.7 shall be
binding upon the Preferred Holders, Key Management Holders and each transferee
of the Registrable Securities, each future holder of all such Registrable
Securities, and the Company.
14.8 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
14.9 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party of any breach or default under this Agreement, or any
waiver on the part of any party of any provisions or conditions of this
Agreement, must be made in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement, or by law or otherwise afforded to any Preferred Holder or Key
Management Holder, shall be cumulative and not alternative.
14.10 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof and any other written or oral agreements between the
parties hereto are expressly canceled.
-15-
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Agreement of
the day and year first above written.
COMPANY: PREFERRED HOLDERS:
INTERNET SECURITY SYSTEMS, INC. AT & T VENTURE FUND II, L.P.
By: By:
---------------------------- ----------------------------------------
Name: Richard S. Bodman
Name: Title: General Partner
--------------------------
Title:
-------------------------
GREYLOCK EQUITY LIMITED
PARTNERSHIP
KEY MANAGMENT HOLDERS:
By: Greylock Equity GP Limited Partnership
Its General Partner
- -------------------------------
Christopher Klaus By:
-----------------------------------------
General Partner
- -------------------------------
Thomas Noonan
--------------------------------------------
John P. Imlay, Jr.
- -------------------------------
Glenn McGonnigle
KLEINER PERKINS CAUFIELD & BYERS
By: KPCB VIII Associates
- -------------------------------
Kevin O'Connor
By:
-----------------------------------------
Name:
Title:
***RIGHTS AGREEMENT***
<PAGE> 20
KPCB INFORMATION SCIENCES
ZAIBATSU FUND II
By: KPCB VII Associates
By:
-----------------------------------------
Name:
Title:
KPCB JAVA FUND
By: KPCB VIII Associates
By:
-----------------------------------------
Name:
Title:
SIGMA ASSOCIATES, III, L.P.
By: Sigma Management III, L.P.
By:
-----------------------------------------
General Partner
SIGMA INVESTORS III, L.P.
By: Sigma Management III, L.P.
By:
-----------------------------------------
General Partner
SIGMA PARTNERS III, L.P.
By: Sigma Management III, L.P.
By:
-----------------------------------------
General Partner
***RIGHTS AGREEMENT***
<PAGE> 21
VENTURE FUND I, L.P.
By:
-----------------------------------------
Name:
Title:
***RIGHTS AGREEMENT***
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant.
1. Internet Security Systems, Inc. (Georgia).
2. Internet Security Systems Europe N.V. (Belgium).
3. Internet Security Systems K.K. (Japan).
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 13, 1998, in the Registration Statement (Form
S-1) and related Prospectus of ISS Group, Inc. dated January 20, 1998.
/S/ Ernst & Young LLP
Atlanta, Georgia
January 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS OF INTERNET SECURITY SYSTEMS, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,929,000
<SECURITIES> 0
<RECEIVABLES> 4,038,000
<ALLOWANCES> 255,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,248,000
<PP&E> 1,971,000
<DEPRECIATION> 402,000
<TOTAL-ASSETS> 9,866,000
<CURRENT-LIABILITIES> 5,976,000
<BONDS> 140,000
8,878,000
0
<COMMON> 132,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,866,000
<SALES> 13,467,000
<TOTAL-REVENUES> 13,467,000
<CGS> 676,000
<TOTAL-COSTS> 676,000
<OTHER-EXPENSES> 16,938,000
<LOSS-PROVISION> 195,000
<INTEREST-EXPENSE> 17,000
<INCOME-PRETAX> (3,919,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,919,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,919,000)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> 0
</TABLE>
